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Income Tax Appellate Tribunal, “ D ” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI MAKARAND V. MAHADEOKAR
Assessee by : Shri M.K. Patel, Advocate Revenue by : Shri Prithviraj Meena, CIT-DR & Shri Regnesh Das, Sr.DR सुनवाई की तारीख/Date of Hearing : 19/09/2024 घोषणा की तारीख /Date of Pronouncement: 26/09/2024 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM:
These appeals by the assessee, Gujarat State Electricity Corporation Ltd. (GSECL), are directed against the orders of the Commissioner of Income Tax (Appeals)- I, Baroda (hereinafter referred to as “CIT(A)”), confirming the additions made by the Assessing Officer ([hereinafter referred to as “AO”) to the book profits computed under Section 115JB of the Income-tax Act, 1961 AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT ([hereinafter referred to as “the Act”) for Assessment Years (AYs) 2002-03 and 2004-05. Facts of the Case: 2. The assessee, GSECL, is engaged in the generation and distribution of electricity from various power stations across Gujarat. The assessee filed its returns of income and the same were assessed u/s 143(3) of the Act and also reassessed u/s 143(3) of the Act read with section 254 of the Act. The assessee preferred appeals against the order of AO and the CIT(A) passed the orders on 17-07-2015 confirming the additions except addition on account of gratuity. For both assessment years, the CIT(A) held that the assessee, being a company incorporated under the Companies Act, was liable to MAT under Section 115JB, despite its statutory function under the Electricity (Supply) Act, 1948. 2.1. The details of assessments, re-assessments and appeals are tabulated below for the sake of clarity: Assessment Details A.Y. 2002-03 A.Y. 2004-05 Date of Filing Return 29.10.2002 29.10.2004 Returned Income Rs. 98,09,88,263/- Rs. 12,47,80,000/- under Section 115JB Original Assessed Rs. 1,04,45,18,615/- Rs. 13,92,69,769/- Income under Section 115JB 1. Prior period Additions to income Gratuity and leave u/s 115JB in Original expenses of Rs. encashment of Rs. Assessment 6,33,30,737/- 1,44,89,769/- 2. Gratuity and leave encashment of Rs. 1,99,615/- Date of Original 22.02.2005 29.12.2006 Assessment Order ITA Nos2841&2842/Ahd/2015; AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT Reassessed Income Rs. 1,04,43,19,000/- Rs. 12,49,02,000/- under Section 115JB (after ITAT Set-Aside) 1. Gratuity and leave Additions to income Gratuity and leave u/s 115JB in Re- encashment of Rs. encashment of Rs. Assessment 1,99,615/- 1,44,89,769/- 2. Foreign exchange variation of Rs. 1,22,000/- Date of Re- 28.03.2013 28.03.2013 Assessment Order Total Income under NIL NIL Normal Provisions Tax Demand Raised Rs. 4,65,66,900/- Rs. 5,77,26,130/- Section under which Section 143(3) read with Section 143(3) read order is passed Section 254 with Section 254 Additions Deleted by Gratuity and leave Gratuity and leave CIT(A) encashment of Rs. encashment of Rs. 1,99,615/- 1,44,89,769/-
Aggrieved by the order of CIT(A), the assessee is in appeal before us with following grounds of appeal:
Grounds of assessee in (A.Y. 2002-03): 1.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts has confirmed the additions of prior period expense amounting to 76,33,30,737/- made to the Book Profits computed under section 115JB of the I T Act without considering the facts of the case in right spirit.
1.1 The learned Commissioner of Income Tax (Appeals) ought to have appreciated that the Hon'ble Tribunal had set aside the issue to examine the applicability of provisions of section 115JB of the I T Act in view of the judgement of Kerala High Court in case of Kerala State Electricity Board vs. DCIT, reported at 196 Taxman 1 and the decision of Mumbai bench of ITAT in case of Maharashtra State Electricity Board, 77 TTJ 33. 1.2 The learned Commissioner of Income Tax (Appeals) has held that there has been a mistake apparent from record in the above two judgements whereby the AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT High Courts held that there was no express exclusion of the companies engaged in the generation and distribution of power from the applicability of provisions of section 115JA of the I T Act.
The learned Commissioner (Appeals) invited reference to the clause (iv) of the sub-section 2 of section 115JA of the Act which provides that the net profit as shown in the Profit & Loss Account has to be reduced by the amount of the profit derived from an industrial undertaking engaged in the business of generation or distribution of power.
Thus even by virtue of above clause (iv) of sub-section (2) of section 115JA of the Act the appellant becomes eligible to 100% deduction which the learned Commissioner (Appeals) has not allowed.
2.0 The appellant craves leave to add to, alter, delete or modify the above ground of appeal either before or at the time of hearing of this appeal.
Grounds of assessee in (A.Y. 2004-05):
1.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts has confirmed the additions of Foreign Exchange Variation of Rs. 1,22,000/- made to the Book Profits computed under section 115JB of the I T Act without considering the facts of the case in right spirit. 1.1 The learned Commissioner of Income Tax (Appeals) ought to have appreciated that the Hon'ble Tribunal had set aside the issue to examine the applicability of provisions of section 115JB of the I T Act in view of the judgement of Kerala High Court in case of Kerala State Electricity Board vs. DCIT, reported at 196 Taxman 1 and the decision of Mumbai bench of ITAT in case of Maharashtra State Electricity Board, 77 TTJ 33. 1.2 The learned Commissioner of Income Tax (Appeals) has held that there has been a mistake apparent from record in the above two judgements whereby the High Courts held that there was no express exclusion of the companies engaged in the generation and distribution of power from the applicability of provisions of section 115JA of the I T Act.
The learned Commissioner (Appeals) invited reference to the clause (iv) of the sub-section 2 of section 115JA of the Act which provides that the net profit as AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT shown in the Profit & Loss Account has to be reduced by the amount of the profit derived from an industrial undertaking engaged in the business of generation or distribution of power.
Thus even by virtue of above clause (iv) of sub-section (2) of section 115JA of the Act the appellant becomes eligible to 100% deduction which the learned Commissioner (Appeals) has not allowed.
2.0 The appellant craves leave to add to, alter, delete or modify the above ground of appeal either before or at the time of hearing of this appeal.
During the course of hearing before us, the Authorised Representative (AR) of the assessee placed on record the judgement of Hon’ble Supreme Court in case of PCIT Vs. Ajmer Vidyut Vitran Nigam Ltd. [2022] 145 taxmann.com 26, which dismissed the SLP arising out of the judgement of Hon’ble High Court of Rajasthan in case of PCIT Vs. Ajmer Vidyut Vitran Nigam Ltd. [2022] 140 taxmann.com 660, where the Hon’ble High Court by impugned order held that provisions of section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012, would not be applicable to an electricity generating company. The AR stated that the assessee is an electricity generating company governed by Electricity (Supply) Act, 1948. The AR, in support of the said claim, presented the audited financial statements of the assessee and explained that in the audit report of the assessee auditor has stated that – “3. As the Company is governed by the Electricity (Supply) Act, 1948, the provisions of the Act have prevailed wherever they have been inconsistent with the provisions of the Companies Act, 1956.”
4.1. The AR also explained that in the disclosure related to significant accounting policies in Schedule – 17 of the financial statements, there is a AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT reference to the governing provisions of Electricity (Supply) Act, 1948. The AR further explained that the provisions of section 61 and section 69 of The Electricity (Supply) Act, 1948 requires the assessee to follow prescribed format of financial statements as notified by the Central Government. The AR heavily relied on the said judgement.
The Departmental Representative, on the other hand, pointed out that the assessee has taken this ground relating to applicability of section 115JB, for the first time before the Tribunal but did not object to admission of the same. The DR relied on the order of CIT(A) and stated that the assessee is not a Board but a company registered under Companies Act, 1956, which has share capital and also declared dividend. The DR stated that the accounts of the assessee are also audited by Comptroller and Auditor General of India and the assessee has calculated its income as per the provision of 115JB and paid taxes there on the basis of same audited financial statements. The DR also pointed out the statement of total income wherein by way of foot note, the assessee has accepted that the provisions relating to Minimum Alternate Tax are applicable to the assessee. The DR also stated that only AO has a power to reduce the income as disclosed by the assessee in the return of income.
In rejoinder, the AR stated that the assessee company was established in accordance with the restructuring plan of the Gujarat Electricity Board and therefore the judgement of Ajmer Vidyut Vitran Nigam Ltd. is applicable to the assessee being part of erstwhile Board. The AR also pointed out that the CIT(A) has referred section 115JA and not 115JB in his order. The AR also argued that the provisions of 115JB are applicable to all companies with effect AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT from 01-04-2013 and therefore the assessee is out of the purview of the same for the assessment years under consideration. The AR also stated that the CIT(A) has a power to give relief to the assessee when the assessee by mistake is over assessed. For this contention, the AR placed reliance on the judgment of Jurisdictional High Court in case of S.R.Koshti Vs CIT reported at [2005] 146 taxman 335 (Gujarat).
We have heard the rival contentions, perused the material on records and note that the CIT(A) has passed a reasoned order while rejecting the assessee’s plea that the provisions of section 115JB are not applicable. The CIT(A) observed that the assessee had relied on judicial precedents, including the Kerala High Court decision in Kerala State Electricity Board vs. DCIT (196 Taxman 1) and the Mumbai ITAT decision in Maharashtra State Electricity Board (82 ITD 422), which held that statutory corporations engaged in power generation are not subject to MAT due to their distinct statutory obligations. The CIT(A) dismissed the reliance on these cases, stating that the facts of the present case were different because the assessee (referred as “GSECL”), was incorporated under the Companies Act, 1956, and not as a statutory corporation like the entities in the cited cases. The CIT(A) concluded that Section 115JB explicitly applied to companies preparing their financial statements under the Companies Act, 1956, including the assessee. Thus, the provisions of MAT were held applicable, rejecting the argument that the Electricity (Supply) Act exempted the assessee.
7.1. The CIT(A) reasoned that the judicial decisions cited by the assessee pertained to statutory bodies that were not companies in the traditional sense but were treated as companies only under deeming provisions of the Income AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT Tax Act. The CIT(A) emphasized that GSECL is a company incorporated under the Companies Act and consistently filed its returns declaring income under MAT and therefore, the assessee’s own filings and financial disclosures under the Companies Act undermined its argument for exemption. The CIT(A) pointed out that the preparation of financial statements under the Companies Act involves compliance with Parts II and III of Schedule VI, which dictate the accounting principles, presentation, and disclosure requirements. This is particularly relevant because Section 115JB mandates the computation of book profits based on financial statements prepared as per the Companies Act. It was pointed out that even though the Electricity (Supply) Act governed the preparation of accounts, the provisions of Section 115JB were clear in their scope and applied to any company defined under the Companies Act, thus encompassing GSECL. The CIT(A) also referred to specific provisions under Section 115JA, highlighting that while certain exemptions were provided to companies engaged in power generation under previous MAT provisions, such exclusions were not extended under Section 115JB.
7.2. The CIT(A) discussed that GSECL has an authorized share capital and has consistently declared and paid dividends to its shareholders, including during the relevant assessment years. The payment of dividends is a significant factor considered under MAT provisions, which aim to levy tax on companies paying dividends despite showing minimal or zero taxable income. CIT(A) noted that the assessee company declared dividends, which were paid out of its profits, reflecting its compliance with the requirements under the Companies Act for dividend declarations. This demonstrated that GSECL operated as a regular company, reinforcing its obligation to MAT. The AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT CIT(A) contrasted GSECL’s actions with statutory corporations that do not pay dividends to private shareholders. In cases like MSEB and Kerala State Electricity Board, the entities did not distribute profits in the form of dividends because they were government-controlled bodies without traditional shareholders, making MAT less relevant.
7.3. The CIT(A) also analysed Section 115JA, a predecessor to Section 115JB, which introduced the concept of taxing companies on their book profits to curb the practice of zero-tax companies. Section 115JA specifically excluded companies engaged in the generation or distribution of electricity from its ambit. However, Section 115JB did not carry forward this explicit exclusion. CIT(A) argued that the omission was intentional and reflected the legislative intent to include all companies, including those in the power sector, under the MAT provisions, unless expressly exempted by the statute. CIT(A) pointed out that the specific exemptions for power companies under Section 115JA (which allowed deduction of profits derived from power generation from book profits) were not present in Section 115JB. Therefore, the general provisions of MAT under Section 115JB applied to GSECL.
7.4. The CIT(A) referenced Circular No. 762 issued by the Central Board of Direct Taxes (CBDT), which explained the purpose of Section 115JA. The Circular noted that the MAT was introduced to tax companies that paid significant dividends while showing minimal or zero taxable income under normal provisions. The Circular highlighted that companies engaged in specific businesses, such as power generation and infrastructure, were initially exempted to promote infrastructural development. However, CIT(A) argued that the Circular’s applicability was limited to Section 115JA and did AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT not extend to Section 115JB, which did not include similar exemptions. CIT(A) stated that while Circular No. 762 explained the legislative intent behind Section 115JA, it did not have binding authority over Section 115JB, which was a distinct provision with broader applicability.
7.5. The CIT(A) recognized that certain incentives were provided under Section 115JA to promote infrastructural development, including generation and distribution of power, by exempting profits from such activities from MAT. However, CIT(A) highlighted that these incentives were policy-driven and specific to the legislative framework of Section 115JA. The lack of similar provisions in Section 115JB indicated a shift in legislative intent, aiming to include all companies within the MAT framework unless explicitly excluded. CIT(A) argued that GSECL’s reliance on infrastructure-related exemptions was misplaced, as the MAT provisions under Section 115JB were designed to capture all companies preparing accounts under the Companies Act, regardless of the business sector.
7.6. The CIT(A) referred to the Mumbai ITAT’s decision in Maharashtra State Electricity Board (MSEB) vs. DCIT, where MSEB was held not liable under MAT due to its status as a statutory corporation formed under the Electricity (Supply) Act, 1948. The ITAT in the MSEB case emphasized that MSEB was not a company incorporated under the Companies Act but was treated as a company only for taxation purposes under specific deeming provisions of the Income Tax Act. This distinction was critical because MSEB did not prepare its financials under the Companies Act and did not convene Annual General Meetings (AGMs) or pay dividends like a traditional company. CIT(A) differentiated GSECL from MSEB, noting that GSECL was AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT incorporated as a company under the Companies Act, held AGMs, and paid dividends, making it fully subject to Section 115JB.
7.7. The CIT(A) also referred to the Kerala High Court’s decision in Kerala State Electricity Board vs. DCIT, where the court held that the MAT provisions did not apply to the Kerala State Electricity Board, a statutory corporation. The court observed that the Kerala State Electricity Board, like MSEB, was not a company under the Companies Act and was governed by the Electricity (Supply) Act, 1948. It was not required to prepare accounts in compliance with Parts II and III of Schedule VI of the Companies Act, and it did not pay dividends. CIT(A) argued that this precedent was not applicable to GSECL, as the facts differed significantly and GSECL, unlike the Kerala State Electricity Board, was a company in both legal and practical terms, bound by the Companies Act, and thus liable under MAT provisions.
7.8. The arguments advanced by the CIT(A) in the present matter merit a detailed appreciation for their adherence to statutory interpretation and judicial principles that govern the applicability of tax provisions. The CIT(A) meticulously analysed the legislative framework of Section 115JB but has not considered the specific exclusions embedded within the provision prior to the amendment effective from 1-4-2013. The CIT(A) acknowledged the intent behind Section 115JB to bring companies with significant book profits into the tax net but has not noted that electricity companies were governed by statutes such as the Electricity Supply Act, 1948, and the Electricity Act, 2003, which required different accounting standards. In light of the judgment of Ajmer Vidyut Vitran Nigam Ltd. by the High Court of Rajasthan, it is evident AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT that the findings of the CIT(A), although thorough and based on existing legal principles, cannot be sustained.
7.9. At this stage, we are inclined to discuss the legislative intent and the principle of “Substance Over Form”. The primary purpose of introducing provision relating to MAT was to tax companies that, despite having significant book profits, paid minimal or no tax due to various deductions under the Act. However, the legislative framework before the 2012 amendment did not specifically include electricity companies because they prepared their accounts under specialized statutes and not under the Companies Act. This distinction was crucial in determining the applicability of MAT. The doctrine of substance over form typically emphasises that the economic reality of a transaction should take precedence over the legal form. However, in the context of Section 115JB, this principle does not override statutory exclusions. Various courts noted that the legislative intent was not to cover electricity companies under MAT prior to the amendment. They emphasized that companies preparing accounts under other statutes were not meant to be brought under MAT unless explicitly stated by an amendment.
7.10. In case of A.Y. 2002-03, the CIT(A) confirmed the addition of prior period expenses to the book profits computed under Section 115JB, arguing that GSECL, as a company incorporated under the Companies Act, was bound by the MAT provisions. The CIT(A) emphasized the statutory differences between GSECL and other statutory corporations, such as the Maharashtra State Electricity Board and Kerala State Electricity Board, which were not companies under the Companies Act. However, in light of the AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT Supreme Court’s dismissal of the SLP in the case of Ajmer Vidyut Vitran Nigam Ltd., it is clear that the provisions of Section 115JB, as they stood before the amendment by the Finance Act, 2012, do not apply to companies like the assessee company, which are engaged in the generation of electricity and governed by the Electricity (Supply) Act, 1948. Therefore, the CIT(A)’s findings on this ground cannot be upheld. In case of A.Y. 2004-05, the CIT(A) upheld the addition of foreign exchange variations to the book profits under Section 115JB, stating that such liabilities had not crystallized within the relevant assessment year and were unascertained. However, considering the judicial pronouncements and the applicability of MAT provisions to electricity companies, this addition also lacks merit. Since Section 115JB did not apply to the assessee, the inclusion of foreign exchange variations for MAT calculation cannot be justified.
7.11. The CIT(A) dismissed the reliance on the Kerala High Court and Mumbai ITAT decisions on the grounds that those entities were statutory corporations and not companies under the Companies Act. However, the High Court of Rajasthan, in Ajmer Vidyut Vitran Nigam Ltd., clarified that the MAT provisions under Section 115JB did not apply to electricity companies governed by specific statutes distinct from the Companies Act, regardless of their incorporation status. Thus, the CIT(A)’s rejection of these judicial precedents is not sustainable.
7.12. The CIT(A) referenced Section 115JA of the Act, highlighting exclusions under Clause (iv) for companies engaged in power generation, but argued that this exclusion was not extended to Section 115JB. However, we note that the legislative history and the interpretation provided by higher AYs 2002-03 & 2004-05 Gujarat State Electricity Corporation Ltd. Vs. DCIT judicial authorities clearly establish that companies like GSECL (the assessee company) were not intended to be covered by MAT prior to the amendment in 2012. Consequently, the CIT(A)’s interpretation does not align with the legislative intent and judicial guidance.
7.13. In view of Hon’ble Supreme Court’s decision affirming the High Court’s ruling in Ajmer Vidyut Vitran Nigam Ltd., it is evident that the CIT(A)’s reliance on the incorporation status under the Companies Act and interpretation of statutory provisions, although well-reasoned, cannot be sustained. The provisions of Section 115JB did not apply to electricity companies governed by distinct statutes before the amendment effective from 1-4-2013. Therefore, we allow the appeals of the assessee for both assessment years, and the additions to the book profits under Section 115JB are hereby deleted.
In the combined result, both the appeals of assessee in are allowed.