DCIT 14(3)(1), MUMBAI vs. RELIANCE INFRSTRUCTURE LTD, MUMBAI

PER MAHAVIR SINGH, JM:

These two appeals, one by the Revenue and other by the assessee are arising out of the common order of the CIT (A)-22, Mumbai in appeal No. CIT (A)-21/IT/161/2013-14 dated 04-12-2014. Assessment was framed by the ACIT-10(1), Mumbai vide his order dated 30-03-2013 for A.Y. 2010-11 u/s 143(3) of the Income Tax Act, 1961 (hereinafter “the Act”).

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First Revenue’s appeal in ITA No. 1422/Mum/2015 for the AY 2010-11

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the claim of Rs. 43,29,42,626/-in account of replacement of electricity meters, even though the impugned expenditure is inherently capital in character as the installation and replacement of electricity meters given to the end customers is capital expenditure and the meter deposits received against the same is shown as capital advance by the assessee."

“4.2 1 have considered the facts and circumstances of the case. This issue had come into consideration of Hon'ble ITAT in A.Y.2008-09 and CJT(A) in A.Y. 2009-10 held as under:

Hon'ble ITAT in A. Y 2008-09:

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consequently, the ground raised by the revenue is treated as dismissed."

CLT(A)'s order in A.Y.2009-10

"3.1. I have carefully considered the facts of the case. This issue was also there in appellant's own case in the earlier assessment years. In A. Y. 2007-08, my predecessor CIT(A)-1 Mumbai vide order dated 27-01-2010 deleted the disallowance following the decision of RAT in A. Y 1999- 2000 to 2005-06. In A. Y. 2006-07 and 2007- 08, the ITAT deleted the disallowance following the ITAT decisions from A. Y. 1999- 2000 to 2004-05. Since the issue under consideration is covered in favour of appellant by the ITAT orders, the disallowance made by AO in the year under consideration is deleted. This ground of appeal is, the therefore, allowed."

Following the above decision, the disallowance of expenditure of replacement of meter is allowed as revenue expenditure, hence, appellant's claim for Rs.43,29,42,626/- is allowed and A.O. is directed to allow difference between depreciation allowed i.e. (Rs.43,29,42,626 - 4,87,06,045 38,42,36,581). The A.O. is directed to allow Rs.38,42,36,581/- for replacement of meters as appellant had already allowed Rs.4,87,06,045/- for depreciation.

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No. 277 of 2009 dated 01-07-2013 wherein Hon’ble High Court held as under: -

"(ii) In any view of the matter, the expenditure incurred on the replacement of the electricity meters was held to be capital expenditure by the Assessing Officer. This was on the ground that this electricity meters were installed at the premises of the customers after taking deposit from the consumers and it led to an enduring benefit to it. In appeal, the CITA(A) has allowed the appeal of the respondent- assessee holding that expenses incurred on replacement of electricity meters is of revenue nature while following the orders of his predecessors for the earlier Assessment Year. On further appeal by the revenue, the Tribunal held that these electricity meters have to be replaced periodically on account of obsolescence, meters burning out or becoming faulty etc. and these expenses are necessarily required to be incurred for the purposes of carrying out business operations. The expenditure is incurred for the purposes of enabling the Respondent- Assessee to carry out its business more efficiently and more profitably. The replacement of meters does not increase the generation and/or distribution capacity of electricity. Moreover, as held by the Supreme Court in the matter of Empire Jute Co. Ltd. v/s. CIT (124 ITR 1), the test of enduring benefit is not a conclusive test to be applied mechanically without considering the facts of a given case. In the above facts, the expenses on replacement of electricity meters would be on revenue and not on capital account.

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(iii) The Counsel for the Respondent has not been able to point out that how the conclusion of the Tribunal in the earlier years will not be applicable to the present Assessment Year. The Counsel for the revenue has also not been able to show that the finding of fact arrived at by the Tribunal is perverse and/or erroneous. In the above view, we see no reason to entertain Question (a).

“2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the proportionate apportionment of Head Office expenses and allocation of 7,58,93,050/-,

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10,59,72,591/- and 25,27,678/- to Goa Unit, Samalkot Unit and Windmill Unit respectively of the assessee, while computing the profits of eligible business for deduction u/s. 801A, by the AO."

“5.2 1 have considered the facts and circumstances of the case. This issue had come into consideration of Hon'ble ITAT in A.Y.2008-09 and CIT(A) in A.Y. 2009-10 held as under:

Hon'ble ITAT in A.Y.2008-09:

"11. This issue has been discussed by the Tribunal in its order cited supra from paras 14 to 18, wherein the Tribunal has decided the issue in favour of the assessee for the reasons stated therein. Since the issue before us is identical to the issue decided by the Tribunal in assessee's own case cited supra, consequently, the ground raised by the revenue is treated as dismissed.

CIT(A)'s order in A.Y.2009-10

"4.1. 1 have carefully considered the facts of the case. This issue was also there in appellant's own case in the earlier assessment years. In A. Y. 2007-08, my predecessor CIT(A)- I Mumbai vide order

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dated 27-01-2010, by following the C1T'(A) appeal order of A. Y. 2006-07, directed the AO, not to allocate the head office expenses against the Goa unit, Samalkot unit and Windmill unit and grant deduction u/s 80 IA for those units on the profits without allocating the head office expenses. In AY 2007-08, the ITAT, Mumbai, following the ITAT decisions in A. V. 2002-03 to 2006-07, dismissed the department's ground of appeal and directed to the AO to accept the allocation of head office expenses as done by the appellant. There are some decisions of Court/Tribunal holding that head office expenses are required to be allocated to 80-IA units. However, in appellant's own case, the ITAT has decided the issue in appellant's favour. The decision of JTAT in appellant's own case is binding on lower judicial authority i.e. CIT(A). Therefore, since the issue under consideration is covered in favour of appellant by the ITA7' orders, the allocation made by AO in the year under consideration is deleted. This ground of appeal is, therefore, allowed.

Following the above decisions of above orders the A.O. is directed to allow allocation made by the appellant for the head office expenses. The amount disallowed for allocation of head office expenses is deleted. This ground of appeal is allowed."

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17-04-2014, wherein, this issue is dealt with at Para 5 which reads as under: -

“5. Insofar as the question (c) in relation to Head Office Expenses is concerned, the findings of fact by the ITAT for the prior Assessment Years have been referred to and if at all any reference is needed, paragraphs 17 and 18 of the ITAT's order are complete answers. Therefore, the factual findings do not raise any substantial question of law in relation to this claim as well. ."

“3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the transmission and wheeling charges of Z 124,89,16,667/- to the assessee, even though the assessee has not deducted any tax at source thereon while making payment, although the said payments were squarely covered by TDS provisions."

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“6.2 I have considered the facts and circumstances of the case. This issue had come into consideration of Hon'ble ITAT in A.Yrs. 2007-08 to 2000-10 vide ITAT Nos.2814 to 2819/M/2013 in para 6 held as under:

“ We have considered the rival submissions of the Id. Representatives of the parties. A perusal of the above reproduced observations made by the Id. C!77A) while accepting the appeal of the assessee reveals that the id. CIT(A) has followed the various decisions of the co-ordinate benches of the Tribunal to hold that the assessee was not liable to deduct TDS either under section 194- 1 or section 194-I on the 'Wheeling and Transmission Charges' paid by the assessee in case of which provisions of Electricity Act, 2003 were applicable.

The Id. DR could not produce any contrary decision which may justify departure from the almost well settled position of law on the above issue. Hence, respectfully following the decision of the co-ordinate Benches of the Tribunal i.e. “Maharashtra State Electricity Distribution Co. Ltd. vs. DCIT (TDS) Range-2” ITA No. 2872/Mum/2010 for AY 2009-10 and the other decisions as referred by the ld. CIT(A) in his order, the issue is accordingly decided in favour of the assessee and the appeals of the Revenue are hereby dismissed.”

The Hon'ble ITAT held that no tax is deductible on transmission and wheeling charges u/s. 194-I or 194-

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J, hence, A.Os contention that tax is deductible from wheeling charges is erroneous. The addition made by the A.O. is deleted. This ground of appeal is allowed.”

“4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the Foreign Exchange Loss of 66,23,70,735/- holding it revenue in character disregarding the fact that the forex loss of 66,23,735/- was unrealized loss debited to the P & L A/c being a notional loss, lacking any real character in substance."

“7.3 I have considered the facts and circumstances of the case. The appellant had claimed net foreign exchange loss of Rs.90.56 crores which includes realized as well as unrealized exchange gain/loss on account of settlement or revaluation of trade debtors, creditors, foreign currency loan from banks,

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institutions, etc. The details in respect of the forex loss are as under: -

EPC Revenue Capital Loss/Gain Realised Unrealized Realised unrealised Revaluatio (379,843,093) (379,843,093 n of Forex ) Creditors Revaluatio 5,92,298,360 592,298,360 n of Forex Debtors Revaluatio 122,275,175 122,275,175 n of Forex Bank Balances Revaluatio 4,364,782 4,364,782 n of Forex Loans- Buyers Credit

Total 339,095,224 339,095,224 General Revenue Capital Loss/Gain Realised Unrealized Realised unrealised

Revaluatio 22,923,781 67,227,91 154,695,871 n of ICD 0 Bank 106,609,153 106,609,153 balances Preference 3,283,976,472 260,543,966 3,023,432,50 shares 6 Accrued 255,661,638 25,465,164 230,196,474 Premium Receivable ECB (3,296,465,000 (328,265,000 2,968,200,00 ) ) 0 S. Creditors (5,257,423) (5,257,423)

Total 566,448,621 67,227,91 256,047,601 (42,255,870) 285,428,980 0 Net total 323,275,511

66,23,70,735 243,173,110 Total 905,543,845

I had examined the above table. In the foreign exchange loss there are two items, one is of Revenue nature and second items is of capital in nature. The appellant in the P&L account combined the forex loss

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incurred in the revenue account and capital account. Roth of them are claimed as revenue loss from P&L account. On examination of the details it is clear that the appellant is eligible only for the revenue loss and not for the capital loss. The appellant's capital loss cannot be claimed as deduction in the P&L account. When we examine the details regarding revenue items, revaluation of forex creditors, revaluation of forex debtors, revaluation of forex bank balances, revaluation of forex loans buyers credit, revaluation of ICD, Bank balances are all revenue items which loss of the appellant can be allowed as revenue expenditure. however, loss or gain from preference shares, accrued premium receivable ECB are capital in nature. Hence, the loss are deducted from accounts i.e. Rs.24,31,73,1 10/-. This loss was incurred by the appellant as capital in nature and refers the loss or gain incurred in the capital account. The loss incurred in the capital nature cannot be allowed as deduction from P&L account. Hence, this valuation exchange loss incurred by the appellant for Rs.24,31,73,110/- is not allowable. However, revenue loss incurred by the appellant for foreign exchange fluctuation of Rs.66,23,70,735/- will be allowed as deduction, hence, out of claim of the appellant for Rs.90,55,43,845/- only revenue foreign exchange loss of Rs.66,23,70,735/- is allowed. This is supported by the view of Supreme Court decision in the case of Woodward Governor India Pvt. Ltd. 294 ITR 451, Reliance Industries Ltd. vs. CIT 40 Taxmann.com 431, ONGC Ltd. vs. CIT 189 Taxmann 292 (SC). In view of the above Supreme Court decisions, revenue loss of Rs.66,23,70,735/- is allowed and Rs.24,31,73,110/- is confirmed. This ground of appeal is partly allowed."

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Aggrieved, now Revenue is in appeal before us.

EPC REvenue Capital Loss/Gain Realised Unrealised Realised Unrealised Revaluation (379,843,093) (379,843,093) of Forex Creditors Revaluation 592,298,360 592,298,360 of Forex Debtors Revaluation 122,275,175 122,275,175 of Forex bank Balances Revaluation 4,364,782 4,364,782 of Forex Loans Buyers credit Total 339,095,224 339,095,224 General Revenue Capital Loss/Gain Realised Unrealised Realised Unrealised Revaluaion 221,923,781 67,227,910 154,695,871 of ICD Bank 106,609,153 106,609,153 balances Preference 3,283,976,472 260,543,966 3,023,432,506 shares ECB (3,296,465,000) (328,265,000) 2,968,200,000) S. Creditors (5,257,423) (5,247,423) Total 905,543,845 Net Total 256,0477,601 42,255,870 285,428,980 905,543,845 66,23,70,735 243,173,110

The AO has disallowed sum of Rs.66,23,70,735/- on revenue account on the ground that the same is mark to market loss and therefore contingent in nature. The AO also disallowed sum of Rs.24,31,73,110/- being capital

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loss. Thus the total loss disallowed is Rs.90,55,43,845/-. Bot we find that the assessee follows mercantile system of accounting and has adopted Accounting Standard II for recognizing the realized and unrealized gain/ loss on account of foreign currency transactions. The realized or unrealized exchange gain/loss has resulted on account of either settlement or revaluation of trade debtors, creditors, foreign currency loans etc. which relate to business activity of the assessee and the gain/ loss through fluctuation in foreign exchange rate are a consequence of the business activity carried out by the assessee. As per AS 11 - The effects of changes in foreign exchange rates, exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or expenses in the period in which they arise. The loss suffered by the company on account of exchange rate variation as on the date of balance sheet is an ascertained liability valued as per the foreign exchange rate prevailing on the date of balance sheet. Thus it is an ascertained liability allowable u/s. 37(1) of the Act. We find that this issue of the assessee is covered by the decision of Hon’ble Supreme Court in the case of Woodward Governor India Pvt. Ltd. 294 ITR 451. Accordingly, we are of the view that the mark to market loss i.e unrealized loss of Rs.66,23,70,735/- is allowable. We also finf from the facts of the case that from the chart given above, it can be seen that there was realized loss on of Rs.6,72,27,910/- which includes in the figure of Rs. 66,23, 70,735/- and thus the unrealized loss was only Rs. 59,51,42,825/-. We direct the AO accordingly. This issue of vthe revenue’s appeal is dismissed.

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“5. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is justified in holding that provisions of section 115313 are not applicable to the assessee company as the Accounts of the assessee are prepared according to provisions of Electricity Supply Act.”

“11.2 1 have considered the facts and circumstances of the case. This issue had come into consideration of 1-lon'ble ITAT in A.Y.2008-09 and CIT(A) in A.Y. 2009-10 held as under:

Hon'ble ITAT in A. Y.2008-09:

"11. We find that the Tribunal, in its order cited supra, in assessee's own, vide paras 37 to 40, has decided the issue in favour of the assessee. Since the issue before us is identical to the issue decided by the Tribunal in assessee's own case cited supra, consequently, the ground raised by the revenue is treated as dismissed."

CIT(A)’s order in AY 2009-10

"8.1. I have considered the facts of the case. The FIAT in appellants own case in earlier years i.e. from A. Y. 2001-02 to 2007-08 has

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held that the provisions of section 115 JR were not applicable in appellant's case. The FIAT held that the appellant was following the accounting policies under the electricity Supply Act and prepared its accounts in view of those very policies. Following those very policies, the accounts in accordance with part 11 and part III Schedule VI of the Companies Act were not applicable at all. There was no possibility for preparing the accounts in accordance with the pan II and pan II of schedule of the Companies Act as the provisions of section 115 iii could not be forced. The FIAT in appellants own case in earlier years held that the provisions of section 115 JR were not applicable in appellants case. Following the orders of FIAT in appellants own case in the earlier years, it is held that the provisions of section 115 JR were not applicable in the case of the appellant. This ground of appeal is therefore allowed."

Following the above order appellant's compiling accounts under Regulatory Act instead of Companies Act as required for the computation u/s.1 1SJB. Following the above order Sec.1 1SJB is not applicable in the appellant's case. The computation of book profit of appellant is deleted. This ground of appeal is allowed.”

Aggrieved, Revenue is in appeal before us.

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assessee’s favour by following the Tribunal detailed order in ITA No. 218/Mum/2005 for AY 2001-02, wherein Tribunal has held as under: -

“23 We have heard rival submissions and considered them carefully. The contentions raised by the id counsel of the assessee through written note/ submissions are as under:

"Coming to the first issue of levy of tax u/s. 1 15JB, the assessee company submits that section 11 5JB requires every company to prepare its Profit and Loss Account in accordance With the provisions of Parts 11 and HI of Schedule Vito the Companies Act, 2956. The assessee company is an Electricity Company to which the provisions of Electricity Supply Act applies. The said Electricity Supply Act requires the assessee company to follow various accounting policies while preparing the accounts. The accounts are therefore required to be prepared in accordance with the said provisions of Electricity Supply Act. It is submitted that section 211(1) of the Companies Act, 1956 requires every company to prepare the Balance Sheet to give trite and fair view of the state of affairs in the form set out in Part I of Schedule VI of the Companies Act. Prothso to section 211(1) however states that this provision will not apply to a company engaged in the generation or supply of electricity for which a form of Balance Sheet has been specified in or under the Act governing such class of company. Similar section 211(2) of the Companies Act requires every company to prepare a Profit and Loss

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Account to give a true and fair view of the profit or loss of the company and further requires the company to comply with the requirements of' Part H of Schedule VI of the Companies Act. Proviso to section 211(2) further exempts the company engaged in the business of generation or supply of electricity where a form of Profit and Loss Account has been specified in or under the Act governing such class of company. Section 616 of the Companies Act further provides that the provisions of the Companies Act shall apply to companies engaged generation in supply of electricity, except insofar as the said provisions are inconsistent with the provisions of Electricity Supply Act, 1948. Thus the provisions 'of Electricity Supply Act which are different from the provisions of the Companies Act prevail."

As submitted that section 115 JB introduced with effect from 1.4.2001 i.e. AY 2001-02 has incorporated provisions relating to compensation of “book profit” which are different from the provisions relating to the same in section 115J or 115JA.

Section 115J requires every company to prepare its Profit and Loss Account in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, 1956. "Book profit" is, defined to mean the net profit as shown in the Profit and Loss Account prepared in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, 1956. Section 115JA also

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requires every company to prepare its Profit and Loss Account in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, 1956. However a proviso is added to specify that while preparing the Profit and Loss Account the depreciation should be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the Profit and Loss Account laid before the company at its Annual General Meeting.

Thus under section 1 15J the Profit and Loss Account prepared for the purpose of 11,53 can have different method and rate of depreciation then used while preparing the Profit and Loss Account which has been laid before shareholders in the Annual General Meeting. Section 11 .5JA has brought about the above change in order to plug the device of having different depreciation amounts between the accounts presented before the shareholders and the accounts prepared for the purpose of computation of book profit".

Section 115JB also requires every company to prepare its Profit and Loss Account in accordance with the provisions of Part II and Hi of Schedule VI of the Companies Act, 1956. However while preparing the accounts including Profit and Loss Account the company has to follow same method and rates of calculating depreciation as has been adopted for the purpose of preparing Profit and Loss Account as laid before the shareholders in the Annual General Meeting.

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Section 115JB further requires every company to follow the same Accounting Policies and Accounting Standards which have been followed while preparing the accounts which are laid before the shareholders in the Annual General Meeting. Thus under section 115JB, the Profit and Loss Account which is required to he prepared by every company has to adopt the following: The Profit and Loss Account 'should he in accordance with the provisions of Part II and III of Schedule VI of the Companies Act.

The accounts and the Profit and Loss Account so prepared in acceptance with Part 11 and 1ff of Schedule VI of the Companies Act: should again follow the same (a) the Accounting Policies) (b) the Accounting Standards and (c) the rates of depreciation, as have been adopted for the purpose of preparing such accounts including Profit and Loss Account laid before shareholders in the Annual General Meeting.

The thrust of the above provisions is that the Profit and Loss Account for the purpose of section 1 15JB must be in accordance with the provisions of the Companies Act. Further the Accounting Policies, Accounting Standards and Method and Rates of Depreciation adopted in Profit and Loss Account for the purpose of section 115JB should be same as adopted in the Profit and Loss Account laid before the shareholders in the Annual General Meeting.

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As stated earlier, Electricity company is exempted by the Companies Act to follow the provisions of the Companies Act as regards matters which are inconsistent with the provisions of the Electricity Supply Act. Electricity Supply Act has the following provisions, which are different from the Companies Act.

Under the Electricity Supply Act, depreciation on addition to fixed assets can be provided only from the subsequent year of addition and not in the year of addition whereas under the Companies Act, the depreciation is to be provided in the year of addition and even in the part of the year.

Rate of depreciation, under Electricity Supply Act is lower than the rate of depreciation under the Companies Act.

Electricity Supply Act permits only straight line method of depreciation whereas Companies Act permits both Straight Line Method and Written Down Value Method.

Under the Electricity Supply Act, depreciation is restricted to 90% of the cost of the assets whereas under the Companies Act entire asset value is allowed to be written off.

When an electricity Company has incurred losses and unable to bear the burden of depreciation, an amount equal to the unabsorbed depreciation has to be transferred to the depreciation reserve which will be charged td profit and loss account of the year

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in which the profits are made and will, become the additional depreciation charge of that year.

Under the Electricity Supply Act, the company has to capitalize certain replacement expenses like meters and the depreciation in the books whereas under the companies Act, the said replacement expenses have to be write off as revenue expenditure.

Under the Electricity Supply Act, if the profit of the company in a year is in excess of the amount of Reasonable Return as computed under the Electricity Act, 1/3rd of such excess at exceeding 5% of the amount of Reasonable Return only is at the disposal of the company. Out of the balance excess, 50% is to be apportioned to Tariff and Dividend Control Reserve and balance 50% is to be distributed in form of proportional rebate on the amounts collected from the sale of electricity and meter rentals and to he carried forward in the account of company for the distribution to the consumers. Tariff and Dividend Control Reserve is available to the company when the clear profits as computed under the Electricity Supply Act is less than the Reasonable Return in any subsequent year. There is no similar provision in the Companies Act. Under the Electricity Supply Act, the company has to create various reserves out of the retained earning i.e. contingency reserves, which can be utilised or the happening of certain events, and the company has to invest the said reserves in Trust securities. There is no similar provision in the Companies Act.

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In the accounts) which are presented before the shareholders in the Annual General Meeting the assessee, company has followed the above accounting policies as per the requirement of Electricity Supply Act. The above accounting policies are not in accordance with the provisions of the Companies Act. Since the Profit and Loss Account to be prepared for the purpose of section 115J)3 has to follow the same accounting policies as are followed in the accounts presented before the shareholders, the Profit and Loss Account to be prepared under the Companies Act will not be in accordance with the provisions of Schedule VI of the Companies Act. Thus if the Profit and Loss Account is prepared in accordance with the provisions of Schedule Vi of the Companies Act) the accounting policies to be followed in preparation of such Profit and Loss Account will not be same as followed in the Profit and Loss Account presented before the shareholders in the Annual General Meeting. Thus there is a breakdown of the provisions of section 1 15J.B in as much as the Profit and Loss Account cannot be prepared in accordance with the provisions of the Companies Act following the same accounting policies as followed in the Electricity Accounts presented before the shareholders."

Further, reliance was placed on the decision of the Supreme Court in the case…….Liquidator, Palai Central Bank ltd. in 150 ITR 539. It was further submitted in their own case for AY 1988-89, the

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Tribunal has held that the provisions of sec. 115J are not applicable.

24.1 We noted that the assessee’s main contention is that the company has prepared its account in accordance with the provisions of the Electricity Supply Act and not in accordance with the provisions of Part II and Part III of Schedule VI of the Companies Ad. The assessee therefore submits that there cannot be computation of "book profit" as required by Explanation to Section 1 153B. The assessee has submitted that under the Companies Act, the Electricity Companies are allowed to prepare the profit and loss account and the balance sheet in accordance with the statute under which they are operating to the extent the provisions of said statute are not in accordance with or are different from Companies Act. The assessee had submitted that there are major differences in the provisions between the Companies Act and Electricity Supply Act in preparation of accounts. As the per Electricity Supply Act, the following are the major differences: -

i) Under the Electricity Supply Act, depreciation on addition to fixed assets can be provided only from the subsequent year of addition and not in the year of addition whereas under the Companies Act, the depreciation is to be provided in the year of addition and even in the part of the year.

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ii) Rate of depreciation, under Electricity Supply Act is lower than the rate of depreciation under the Companies Act.

(iii) Electricity Supply Act permits only straight-line method of depreciation whereas Companies Act permits both Straight Iine method and Written Down Method.

iv) Under the Electricity Supply Act, depreciation is restricted to 90% of the cost of the assets whereas under the Companies Act entire asset value is allowed to be written off.

v) When an Electricity Company has incurred losses and unable to bear the burden of depreciation, an amount equal to the unabsorbed depreciation has to be transferred to the depreciation reserve which will be charged to profit and loss account of the year in which the profits are made and will become the additional depreciation charge of that year.

vi) Under the Electricity Supply Act, the company has to capitalize certain replacement expenses like meters and provide the depreciation in the books whereas under the Companies Act, the said replacement expenses have to be written off as revenue expenditure.

vii) Under the Electricity Supply Act, if the profit of the company in any year is in excess of the amount of Reasonable Return as computed under the Electricity Act, 1/3rd of such excess not exceeding 5% of the amount of Reasonable Return only is at the disposal

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of the company. Out of the balance excess, 50% is to be apportioned to Tariff and Dividend Control Reserve and balance 50% is to be distributed in form of proportional rebate on the amounts collected from the sale of electricity and meter rentals and to be carried forward in the account of company for the distribution to the consumers. Tariff and Dividend Control Reserve 'is available to the company when the clear 'profits as computed under the Electricity Supply Act is less than the Reasonable Return in any subsequent year. There is no similar provision in the Companies Act.

viii) Under the Electricity Supply Act, the company has to create various reserves out of the retained earning contingency reserves which can be utilised on the happening of certain events and the company has to vest the said reserves in Trust securities. There is similar provision in the Companies Act.

Section 115JB requires every assesse being a company to prepare its profit and loss account in accordance with the provisions of Parts II & III of Schedule VI to the Companies Act. While preparing annual accounts including profit and loss account, the company has to follow the same i.e. accounting policies; accounting standard adopted for preparing such accounts including profit and loss account; the method and rates, adopted for calculating the depreciation, which have been adopted for preparing such accounts including profit and loss account arid laid before the company at

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its Annual General Meeting in accordance with the provisions of Section 210 of the Companies Act, 1956.

24.2 From the above requirement of the Proviso to section 11 53B(2), it is clear that the Electricity company has to comply with the provisions of Parts II & III of Schedule VI and the same time follow the same accounting policies, accounting standard and method and rate of depreciation as followed in the accounts which arc presented in the Annual General Meeting.

24.3 The assessee has claimed that the accounts laid before the Annual General Meeting have followed the accounting policies which are required to be followed under the Electricity Supply Act and which are not in accordance with the Companies Act. The assessee has drawn attention to the requirement of the Electricity Supply Act which provides for the accounting policy in respect of expenses on replacement of meters to be capitalized whereas the same is not in accordance with the Companies Act at the same is required to be written off. Proviso to section 115JB require the Electricity company to follow the same accounting policy while preparing the accounts in accordance with Parts 11 & III of Schedule VI and if the said policy of capitalizing the replacement of meters is followed in preparing the accounts under Companies Act, the accounts will not be in accordance with Parts II & Ill of Schedule VI of the Companies Act. The Electricity company therefore can not and will not be able to prepare the accounts under the Companies Act following the same accounting policy which is

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mandated by the proviso to section 115JB(2) to be followed.

24.4 The assessee further brought to our notice the case of depreciation. Rate of depreciation under the Electricity Supply Act is lower than the rates provided under the Companies Act and if the rates as provided in the accounts presented before the Annual General Meeting i.e. Electricity Act Accounts, the depreciation at the same rates in the accounts for the Companies Act will be below what is required under the Companies Act and therefore the accounts so prepared under the Companies Act will not be in accordance with Parts II & III of Schedule VI.

24.5 The assessee also referred to the requirement of Electricity Supply Act as regards the real profits and Reasonable Return, in the accounts under the Electricity Supply Act, the excess of profits is required to be transferred to Tariff and Dividend Control Reserve and also to be distributed to the consumers. This treatment is not in consonance with the accounting policy which is permitted under the Companies Act as the company is required to disclose the entire profit earned irrespective of the, same being more or less than Reasonable Return, Part IT of Schedule VI requires the profit and loss account shall be so made out as clearly to accounting policy of transferring the excess profits to be under the Electricity Supply Act cannot be followed under the Companies Act and if followed the accounts will not be in accordance Parts II & III of Schedule VI.

24.6 It was, therefore, submitted that an electricity company can not prepare the accounts under Part II

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& III of Schedule VI of the Companies Act following the same accounting policies as followed in the accounts under the Electricity Supply Act which are presented before the company in Annual General Meeting. The assessee therefore submitted that the provisions of section 115JB(2) as mandated by the first proviso cannot be complied with.

24.7 Attention of the Bench was also drawn to the provisions of section, 115JA. Proviso to section 115JA(2) has provided that while preparing profit and loss account under Parts II & III of Schedule VI the same methods and rates which are adopted for calculation of depreciation in the accounts presented before the company in Annual General Meeting should be followed. There was no provision for following the same accounting policies and same accounting standards in both the accounts as prepared under the Electricity Supply Act and under the Companies Act. This material departure in section 115JB from the provisions in section 115JA has resulted in the accounts to be prepared under the Companies Act following the same accounting policies and same accounting standards unworkable and any such attempt to make the accounts will be not in accordance with the provisions of the Companies Act.

25 As per the contentions of the Id counsel of the assessee, there will be a big anomaly in preparing the accounts as per Electricity Supply Act and as per Companies Act. The Hon'ble Supreme Court in the case of CIT vs. Official Liquidator, Palai Central Bank Ltd., in 150 ITR 539, on which reliance was placed by the id counsel of the assessee supports the case by the assessee. This case was under Super Profits

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Tax Act. In this case e was a banking company, which went into liquidation For ….. the Assessing Officer was of the opinion that their taxable e would attract liable to Super Profits Tax Act Under the Act the Super Profit Tax is leviable in respect of chargeable profits, which are in excess of standard deduction as specified in Third Schedule in the said Act. Standard Deduction was defined to mean an amount equal to six percent of the capital of the company or Rs.50,000 whichever is higher. The issue arose as to whether a company in liquidation can be said to have a paid-up capital and reserves. The Supreme Court came to conclusion that after liquidation of company there can not be any share capital. Supreme Court further held that once the provisions contained in the Act for computing the capital of the company and its reserves cannot have any application, the "standard deduction is incapable of ascertainment, and the charge of Super Profits Tax under section 4 of the Act is not attracted. In this case the definition of "Standard Deduction" was to mean six percent of the capital or Rs.50,000 whichever is higher Out of two limbs of the calculation, one limb being capital was not capable of ascertainment. Supreme Court held that when one limb is not capable of ascertainment the whole provision fails, in other words there is "breakdown" of the whole provision and the provision cannot he applied.

25.1. While deciding so, the Hon'ble Supreme Court has taken into consideration its own decision in the case of CIT vs B C Srinivasa Setty in 128 JTR 294 wherein Supreme Court had pointed out that under the scheme of the Income Tax Act charge of tax will

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not get attracted unless the case or transaction falls under the governance of the relevant computation provisions. The Supreme Court in B.C. Srinivasa Setty's case as observed as under:-

"The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a. case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within, the charging section, there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion".

26.1 The Hon'ble Supreme Court in the case of Kwality Biscuits Ltd in 284 ITR 434 has held that provisions of sec. 23413 & 234C are not applicable in respect to computation of deduction u/s 1153

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because the computation of profit under the provisions of sec. 1 15J has to be made on the basis of book profit and since the entire exercise of computing the income under section 1 15J can only be done at the end of the financial year, and the provisions of sec. 207,208, 209 & 210 cannot be made applicable 'until and unless the accounts are audited and the balance sheet prepared. The ratio of this decision helps the case of the assessee because it is not possible to prepare the accounts in accordance with part II &III of Schedule VT of the Companies Act for the purpose of provisions of sec. 115JB. Therefore, in view of the ratio of this decision, in our considered view, the provisions of sec. 115dB cannot bc attracted of the present case.

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law does not compel a man to do that which he cannot possible perform. The law creates a duty or charge, and the party is disable to perform it, without any default in him, and has no remedy over, there the law will in general excuse him arid though impossibility of performance is in general no excuse for not performing an obligation which a party has expressly undertaken by contract yet when the obligations one implied by law, impossibility of performance is a good excuse. Thus in a case in which consignees of a cargo were prevented from unloading a ship promptly by reason of a dock strike, the Court, after holding that in the absence of an express agreement to unload in a specified time there was implied obligation to unload within a reasonable time, held that the maxim lex non cogit ad impossibilia applied.

28 As discussed above when it is not possible to prepare the accounts under the Companies Act for the purpose of computation u/s 115JB, therefore, assessee cannot he forced to prepare the accounts when it is not possible. Therefore, we are in agreement with the contentions of in as much as the accounting policies followed in the …..accounts if followed for the preparation of Companies Act. 1 not disclose true and fair view and will not be in accordance work part II and III of Schedule VI of the Companies Act. The ratio of the decisions of the Hon7ble Supreme Court and the ratio of the decision of the Tribunal discussed above are in support of the contentions of the assessee. We further found that the issue of applicability of sec. 115J came before the Tribunal for AY 88-89. Taking into consideration the preparation of accounts under the Electricity Act

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and other contentions the assessee including the decisions of the Supreme Court in the case of B.C.Srinivasa Setty (supra), the Tribunal has held that. the provisions of Sec. 115J are not attracted on the facts of the present case.

29 As discussed above, the assessee is following the accounting policies under the Electricity Supply act and prepared its accounts in view of those very policies. Following those very policies, the accounts in accordance with part II & III of Schedule VI of the Companies Act are not applicable at all. Once there is no possibility for preparing the accounts in accordance with the part II & 11 of Schedule VI of Companies Act then the provisions of sec. 115JB cannot be forced. Therefore, in view of the above facts and circumstances and respectfully following the above decisions of the Hon'ble Supreme Court and the decision of the Tribunal for AY 88-89, we hold that provisions of sec. 115JB are not applicable on the facts of the present case.”

Taking consistent view, we confirm the order of CIT(A) and hence, appeal of Revenue on this issue is dismissed.

“6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO not to consider the interest expenses for working out the disallowance u/s. 14A r. w. Rule 8 D.

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6.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to exclude the investments made in subsidiary companies by the assessee while working out the average investment @ 0.5% as mandated by the Rule 8D of the IT Rules without appreciating the fact that the assessee has earned exempt income from the investment in subsidiary companies.

Sl Particulars Amount Exempt No. u/s. 1. Interest on 6.85% of 6,85,00000 10 IIFCL tax free bonds 2. Dividend on shares 1151009000 10(34) 3 Dividend on Mutual fund 503026189 10(35) units Total 1722535189

“10.3 I have considered the facts and circumstances of the case. The A.O. had disallowed Rs.37,34,41,170/- u/s.14A. This disallowance is for

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the expenditure related to interest and administrative expenditure. However, when we examine appellant's own funds, the appellant is having share capital of Rs.244.92 crores and reserves of Rs.14366.19 crores. The share capital and reserves in the appellant's balance sheet is together i.e. totaling to Rs.14611 crores. The total investment for earning exempt income is Rs.10119.57 crores. Here appellant's own funds is more than the investments, hence, no disallowance is required for interest u/s.14A r.w. Rule 8D (2)(i) in view of Bombay High Court decisions in the cases of Reliance Utilities and Power Ltd. 178 Taxman 135, CIT vs. HDFC Bank Ltd. ITA No.330 of 2012 and Winsome Textile Industries Ltd. 319 ITR 204 (P&H). However, the A.O. is directed to disallow 0.5% of the average investment for administrative expense.

During appellate proceedings the appellant had filed additional ground stating that disallowance u/s. 14A as per Rule SD should be made considering only those investment on which is tax free income is received during the year. On this issue appellant had relied on the decision of Cheminvest Ltd. Special Bench. On considering the above decision, ITAT held that "if there is no exempt income earned, then no disallowance is required u/s.14A", however, in our case, there are two incomes where appellant had earned exempt income and another investment appellant had not earned any exempt income. When we examine the case of Cheminvest Ltd., in this case there is only one investment in which no income is earned, but in our case in some investment there is exempt income earned in some investment no exempt income is earned. Hence, facts are

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distinguishable in this case, therefore, appellant's claim is dismissed on this issue.

The appellant had raised additional ground that disallowance of interest and expenses under Rule 8D(2)(ii) and 8D(2)(iii) should not he made with respect to investment which are made in the subsidiary company of the appellant. The appellant had relied on the decision of Garware Wall Ropes Ltd. vs. Addl. CIT 46 Taxmann.com 18, J. M Financial Ltd. vs. Addl. CIT ITA No.4521/MUM/2012 dtd. 26.03.2014. On examination (the above cases, the ITAT held that investments in subsidiary companies were investments were made for controlling stake, no disallowance can be made under section I4A r.w. Rule RD(2)(ii) and 8D(2)(iii). Hence, following the ab' decisions, the A.O. is directed not to disallow under Rule 8D(2)(ii) a 8D(2)(iii)

In conclusion the A.O. is directed that no interest disallowance is he made in this case as appellant's reserves and surplus are more the appellant's total investment. However, disallowance of 0.5% of average investment can he made for administrative expenses. In this disallowance also no disallowance can be made on the investments for the subsidiary companies. Hence, this ground of appeal is party allowed."

Aggrieved, Revenue is in appeal before us.

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the revised return of income on account of change in assets, investments and interest expense on withdrawal of the demerger scheme. The above disallowance was worked out taking all investments whether they have yielded any income during the year or not and also considering interest expense. During the course of assessment proceedings, the assessee was asked to furnish details as per the provisions of section 14A of the Act r.w.r. 8D of the rules in response to which the assessee had filed a revised computation of free income was earned/received during the year. The assessee has showed the investments on which exempt income is received and those investments on which no income is received. The assessee submitted that disallowance of interest under Rule 8D(2)(ii) is not warranted in the facts of the assessee's case as the assessee had sufficient amount of interest free funds available with them in form of share capital and reserves. The interest free funds available are as under: -

Opening Closing Share capital 226.07 244.92 Reserves 10,897.88 14,366.19 Total 11,123.95 14,611.11 As against the above, the total investments as appearing in the balance sheet are as under: -

In crores Opening Closing Total investments 8,487.02 6,263.63 yielding table income – (A) All tax free investments 3,660.08 3,755.94 That can yield tax free income (B) Investments which has 1,104.61 1,104.61 given tax free income during the year (included in (B) above) Total (A)+(B) 12,147.10 10,019.57

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The appellant relies upon the following decisions of the High Courts in support of their contention that if the capital and reserve is much more than the investment it is presumed that the investment has been made out of own funds and therefore disallowance of interest under section 14A of the Act cannot be made. We find force in the argument of Ld Counsel and in the given facts of the case we are of the view that the CIT(A) has rightly deleted the addition and we confirm the order of CIT(A) . This issue of revenue’s appeal is dismissed.

“7. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to exclude the disallowance of t 37,34,41,170/- u/s. 14A r.w.R. 8D to the Book Profits of the assessee on the premise that the section 115JB is not applicable in case of the assessee without appreciating the fact that such disallowance has to be added to the Book Profits for computing MAT a per the clause (f) of Explanation 1 below sub-section (2) of section 115JB."

7.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the addition made in book profit of 15,00,000/- on the premise that the section 1153B is not applicable in case of the assessee without appreciating the fact that the provision for tax has to

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be added the Book Profits for computing MAT u/s. 1153B.."

“12.2 1 have considered the facts and circumstances of the case. In ground no. 9 it is held that in view of Hon'ble ITAT order and CIT(A) order in appellant's own case, sec. 11 5JB is not applicable in appellant's case, hence, addition of AO under section 115JB is not applicable and addition under section 115JB is infructuous. This ground of appeal is allowed."

“1. The learned Commissioner of Income Tax (Appeals) [hereinafter referred to as CIT(A)] erred in confirming the disallowance of expenditure incurred

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on prospecting of methane gas blocks treating the same as capital expenditure.

Your appellant submits that the said expenditure is not capital expenditure but revenue expenditure incurred in the regular course of the business and the same ought to be allowed as claimed."

“2. The learned CIT(A) erred in considering all investments (excluding investment in subsidiaries) capable of earning tax free income whether they have yielded tax free income or not for computation of disallowance u/s. 14A r.w.R. 8D.

Your appellant submits that only those investments (excluding investment insubsidiaries) which had actually yielded tax free income during the year ought to have been considered while working out disallowance u1si4A r.w.R. 8D.."

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be excluded while making disallowance. We are in agreement with the argument of the assessee and accordingly, we remand this issue back to the file of the AO. This issue of assessee’s appeal is allowed for statistical purposes.

Sd/- Sd/- (RAJESH KUMAR) (MAHAVIR SINGH) ACCOUNTANT MEMEBR JUDICIAL MEMBER Mumbai, Dated: 02-06-2017 Sudip Sarkar /Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.//True Copy// BY ORDER,

Assistant Registrar ITAT, MUMBAI Sr.No. Particulars Date Initials Member Concerned 1 Dictation given direct on computer 30/05/17 S Sarkar JM 2 Draft placed before author 02/06/17 3 Draft proposed/placed before The second Member 4 Draft discussed/approved by Second member 5 Approved Draft comes to the Sr.PS 6 Kept for pronouncement on 7 File sent to the Bench Clerk 8 Date on which file goes to the Head Clerk 9 Date of dispatch of Order