BSES RAJDHANI POWER LTD.,NEW DELHI vs. ACIT, NEW DELHI

per provisions of sec. 37 of the Act. The assessee submitted that the said expenses were incurred in the regular course of its business to deal with cases arising on account of its enforcement initiatives, to defend legal cases, settlement in arbitration matters and other refunds made to customers. The Assessing Officer did not agree with and made an ad hoc disallowance at 25% of the total legal expenditure amounting to Rs.44,71,064 with this finding that the said expenditure is penal in nature hence is not allowable under the provisions of the Act.

44.1 The aforesaid payments, it was submitted, were made by the assessee in pursuance of settlement of certain claims made by consumers, in the regular course of business and did not involve any penal element.

44.2 In this regard, the Learned AR submitted, that the payments made were not on account of infraction or violation of law, but merely in the nature of settlement of disputes arising in the regular course of business and could at best be treated as a trading liability.

44.3 Further, even the assessing officer has failed to pin-point any specific expenditure which is penal in nature and has merely made an ad-hoc disallowance @ 25% of such expenditure, merely on the basis of assumption.

44.4 Even otherwise, payments made to customers and others in lieu of civil claims/ suits, arbitration, etc., are merely in the nature of compensation paid in the regular course of business, which was purely compensatory in nature and cannot, be disallowed under section 37 of the Act.

Reliance in this regard has been placed by the Learned AR on the following decisions: − Prakash Cotton Mills vs. CIT: 201 ITR 684 (SC) − CIT vs. Indian Copper Corporation Ltd.: 161 ITR 327 (Pat) − CIT vs. Grand Cashew Corporation: 182 ITR 216 (Ker) − Jama Auto Industries vs. CIT: 299 ITR 92 (P&H) − CIT vs. Hindustan Copper Ltd.: 55 Taxman 392 (Cal) − CIT vs. Todi Tea Col. Ltd: 239 ITR 28 (Cal.) − G.L. Rexroth Industries Ltd. vs. DCIT: 59 TTJ 757 (Ahd.) − CIT vs. Deversons Industries Ltd.: 104 ITD 171 (Ahd.)

input, storing sets of instructions for solving problems and generating output with high speed and accuracy. Computers are composed of switches, wires, motors, transistors and integrated circuits assembled on frames. The frames form components such as keyboards, printers, visual display units, disk drives, magnetic tape drives and central processing units. These components are wired together into a network called a computing system often called a computer.”

48.1 The Learned AR also placed reliance on the decision of Hon'ble Delhi High Court in the case of assessee itself in of 2010- judgment dated 31.8.2010 (supra). He also placed reliance on the decision of Hon'ble Supreme Court in the case of CIT vs. Birla Soft Ltd., SLP No. (s)

20645/2014.

ITA No. 1437/Del/2011: (A.Y. 2007-08):

The learned CIT(A)-VI has upheld that the service line deposits are capital in nature but in this regard she has wrongly upheld that the same are taxable over a period of 3 years. In fact the same deserves to be reduced from the cost of plant and machinery in accordance with the provisions of Section 43(1) of the Income Tax Act, 1961.

2. Depreciation on energy meters wrongly allowed at 15% as against 80% resulting in a disallowance of Rs. 32, 54, 73,974.

The Ld.CIT(A)- VI has wrongly upheld that the “ Energy Meters ” are eligible for depreciation @ 15 % as against the claims @ 80 % . In this regard she has ignored the facts that these meters are for measuring electric energy which has been specifically mentioned as eligible for 80% depreciation in the depreciation schedule of the Income Tax Rules 1961. Further these meters also has the characteristics of energy saving device which is subject to depreciation @ 80%.

In view of the above, depreciation allowed @ 15 % as against the 80% claim on energy meters resulting in a disallowance of Rs. 32,54,73,974 is wrong, against the facts of the case and unsustainable in the eyes of law”.

51.1 In ground No.1, the issue raised is regarding validity of the First Appellate Order upholding service line deposits from the consumers as taxable over a period of three years. We have dealt with this issue in the appeals for the assessment years 2005-06 and 2006-07 hereinabove and held that the Learned CIT(Appeals) was not justified in not directing the Assessing Officer to reduce the amount of service line deposits credited to the profit and loss account during the year as per the assessee’s policy of offering the service line deposits for Revenue over a period of three years, while computing the total income after holding that entire receipts by way of service line deposits is capital in nature. Following the same, we decide the issue raised in ground No.1 in favour of the assessee with the same finding and with direction to the Assessing Officer to reduce the amount of service line deposits credited to the profit and loss account during the year accordingly while computing the total income treating the entire receipts by way of service line deposits as capital in nature. The ground No.1 is accordingly allowed.

ITA No. 1539/Del/20111: (A.Y. 2007-08):

1. “The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 51,22,43,735/- made on account of disallowance of service line deposits and customer contribution to capital works ignoring that: a) The service line deposits are not in the nature of deposits per se they are Non- refundable as also admitted by the assessee co. b) Once these receipts have been accepted as non-refundable receipts they are no more a liability on the company. Hence the treatment given by the assessee co. to service line deposit by treating them as loan funds and accordingly as liabilities is all together incorrect. c) Further the assessee co. is engaged in selling electricity to the consumers from whom it charges fees in the name of energy charges. These energy charges are undisputedly in the nature of revenue receipts. d) The assessee co. is a service provider co. and is engaged in the business of distribution of electricity to different categories of customers as per their requirements. Hence it is in the nature of service provider. e) Since the assessee co. is engaged in selling the energy, therefore for this purpose it has to provide service line connections to the consumers for which it charges service line deposits. Hence it can be seen that these service line receipts are received by the co. during the course of its regular business/commercial operations. Hence, they are in the nature of revenue receipts. f) The reasoning given by the assessee co. that it incurs capital expenditure for extending service lines to the consumers and these receipts are utilized for this purpose does not explain that how these receipts are capital receipts in its hands. g) The fact that the assessee co itself treated 1/3rd of these receipts as revenue receipts impliedly, goes on to show that the co.believes that they are of revenue nature. h) Further the co. has not submitted any reasoning whatsoever as to why it has treaed specifically 1/3rd of these receipts as revenue receipts and not ½ or 1/4th or some other proportion as revenue receipts. i) Lastly the assessee co. has not provided the details of these receipts including their reconciliation with its books even though specific query was raised in this regard vide not sheet entry dt. 21.11.2008. However a sample voucher of receipt was submitted which reveals that apart from service line charges, the co. is levying development charges from the customers for a new connection. Thus the co. is already collecting funds for incurring capital expenditure. j) The service line receipts simply cannot be treated as capital receipts because their nature would not depend upon how the assessee co. is utilizing them but in what capacity they have been received by the company. And the fact is that they have been received by the company. And the fact is that they have been received by the co. in the course of running its regular business operations. k) The assessee company also not provided the information in the tabular form inspite of specifically asked for by the AO during the Assessment proceedings.

2. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs.32,59,746/- made on account of disallowance of legal claims ignoring that payments made by the assessee are penal in nature and hence not allowable.

3. The Ld.CIT(A) has erred on facts and in law in deleting addition of Rs. 4,33,41,629/- made on account of disallowance of extra depreciation on computer peripherals/accessories ignoring that as per the IT Rules 60% depreciation is allowable only on computer and computer software and not on computer peripherals and accessories.”

“1. Depreciation on energy meters at 15% as against its eligibility of 80%.

The Ld. CIT (A)- V has dismissed this ground mentioning that since appellant has claimed 15% depreciation on Energy Meters in the revised return which has been allowed by the A.O. no cause of grievance arises. In this regard, it has been duly clarified that the appellant has claimed depreciation @ 15% against the eligibility of 80%. The higher depreciation may be allowed in case the appellant authorities allow the claim of 80% in earlier years. Accordingly, the issue of higher depreciation @ 80% on energy meters still stands.

Without prejudice to the ground that service line deposits and consumer contribution for capital works are capital receipts, in case authorities decide these issue otherwise, the additional depreciation on assets created out of service line deposits and consumer contribution should be allowed.”

1. “Whether on the facts& circumstances of the case, the learned CIT (A) has erred in deleting the addition of Rs.1,21,47,44,450/- made by the AO on account of service line deposit without taking into account the fact that the amount received from service line is essentially revenue in nature received from the customers against selling of electricity to the customers for whom the services lines are to be provided and such received during the course of regular business operation.

2. Whether on the facts& circumstances of the case, the learned CIT (A) has erred in deleting the addition of Rs.11,26,99,307/- made by the AO on account of legal claims without taking into account the fact that the payment made included amounts which were penal in nature and hence not allowable.

3. Whether on the facts& circumstances of the case, the learned CIT (A) has erred in holding the revised claim of depreciation of the assessee without verifying the fact that the service line receipts simply cannot be treated as capital receipts, because the nature of the business of assessee is that of service provider and is engaged in selling the Energy for which it charges service line deposit and this is its regular.

4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or any time during the hearing of this appeal”.

1. Depreciation on energy meters wrongly allowed at 25% as against 80% resulting in a disallowance of Rs. 22,65,50,211 (subsequently reduced to Rs 20,36,82,454 by way of rectification order dated 23.07.2010 u/s 154 of Income Tax Act, 1961).

The Ld. CIT(A)- V has wrongly upheld that the “ Energy Meters ” are eligible for depreciation @ 25 % as against the claims @ 80 %. In this regard she has ignored the facts that these meters are for measuring electric energy which has been specifically mentioned as eligible for 80% depreciation in the depreciation schedule of the Income Tax Rules 1962. Further these meters also have the characteristics of energy saving device which is subject to depreciation @ 80%.

In view of the above, depreciation allowed @ 25% as against the 80% claim on energy meters resulting in a disallowance of Rs. 20,36,82,454, is wrong, against the facts of the case and unsustainable in the eyes of law.

2. The appellant craves to leave, add, alter, modify, rectify, and amend all or any of the grounds before or at the time of hearing.

1. “Service Line Deposits received from the Consumers are of Capital nature: The Learned CIT(Appeals) erred in not directing the Assessing Officer to reduce the amount of service line deposits credited to the profit and loss account during the year amounting to Rs.10,43,80,780 (as per the Company’s policy of offering the Service Line Deposits for Revenue over a period of three years), while computing the total income after holding that entire receipt by way of service line deposit is capital in nature.”

2. “That on the facts and circumstances of the case and in law, the Assessing Officer erred in assessing the income of the appellant under sec. 115B and not under the normal provisions of the Income-tax Act, 1961 (“the Act”), without appreciating that the deeming provisions of section 115JB of the Act were not applicable during relevant assessment year.”

The appeal is partly allowed. has questioned First Appellate Order on the following grounds:

“ 1. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 10,94,42,155/- subsequently reduced to Rs. 13033059/- made on account of security line deposits form customers ignoring that: a) The whole of these service line receipts are in fact not a liability of the company but are revenue receipts accrued/received during the year on running of business operations of the assessee company and hence are taxable in its hands. b) Further the assessee co is engaged in selling electricity to the consumers from whom it charges fees in the name of energy charges. These energy charges are undisputedly in the nature of revenue receipts. c) Since the assessee co is engaged in selling the energy, therefore for this purpose it has to provide service line connections to all consumers for which it charges service line deposits. Hence it can be seen that these service line receipts are received by the co. during the course of its regular business/commercial operations. Hence, they are in the nature of revenue receipts. d) The service line receipts simply cannot be treated as capital receipts because their nature would bot depend upon low the assessee co. is utilizing them but in what capacity they have been received by the company. And the fact is that they have been received by the co. in the course of running its regular business operations.

2. The Ld. CIT(A) has erred facts and in law in deleting addition of Rs. 26200000/- made on account of valuation of closing stock ignoring that:

a) In this particular case the assessee was earlier following First In First Out (FIFO) method for valuation of stores/spares. Under any circumstances FIFO method is more correct & hence more appropriate for the valuation of stores/spares as closing stock as compared to “Moving Average” method. b) No sound reasoning/acceptable logic is given by the assessee company for change in the cost method from FIFP to Moving Average. c) The order of CIT(A) is not acceptable because the change in the method of valuation is neither bonafide nor regulatory followed by the assessee as required for the change in the method of valuation. d) Further, on perusal of Accounting Standard-2, provisions of the IT Act, case laws & relevant excerpts from 3CD report which clearly states that due to change of valuation of inventories, profit of the company is lower by Rs. 5.02 crores, it can be soundly included that AO is correct while making the addition on account of valuation of closing stock. e) The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

“1. Service Line deposits from the consumers wrongly upheld as taxable over a period of 3 Years.

The learned CIT (A)-VII has upheld that the service line deposits are capital in nature but in this regard he has wrongly upheld that the same are taxable over a period of 3 years. In fact the same deserves to be reduced from the cost of plant and machinery in accordance with the provisions of Section 43(1) of the Income Tax Act, 1961.

2. Depreciation on energy meters wrongly allowed at 15% as against 80% resulting in a disallowance of Rs. 48,13,62,420.

The Ld. CIT (A) - VII has wrongly upheld that the “Energy Meters” are eligible for depreciation @ 15 % as against the claims @ 80 %. In this regard he has ignored the facts that these meters are for measuring electric energy which has been specifically mentioned as eligible for 80% depreciation in the depreciation schedule of the Income Tax Rules, 1962. Further these meters also have the characteristics of energy saving devices which are subject to depreciation @ 80%.

In view of the above, depreciation allowed @ 15% as against the 80% claim on energy meters resulting in a disallowance of Rs. 48,13,62,420, is wrong, against the facts of the case and unsustainable in the eyes of law.

3. Grant in aid for fixed assets and disallowance of depreciation to the tune of Rs 3,03,32,909.

The Ld. CIT (A) - VII had wrongly upheld that adjustment of grants in aid for fixed assets is to be made in the ratio of addition to plant and machinery which is (subject to depreciation @ 15%) and addition to energy meters which is (subject to depreciation @ 80%) resulting in disallowance of depreciation to the tune of Rs. 3,03,32,909.

4. The appellant craves to leave, add, alter, modify, rectify, and amend all or any of the grounds before or at the time of hearing.”

“That on the facts and circumstances of the case and in law, the Assessing Officer erred in assessing the income of the appellant under sec. 115JB and not under the normal provisions of the Income-tax Act, 1961 (The Act), without appreciating that the deeming provisions of sec. 115JB of the Act were not applicable during relevant assessment year.

78.1. Similar arguments have been advanced by the parties on the allowability of the present application for admission of the above additional ground as advanced by them on a similar application in the appeal of the assessee hereinabove for the assessment year 2005-06. Following the same, the present application is allowed.

78.2 The parties have also adopted similar arguments as advanced by them on the issue raised in this additional ground as advanced by them hereinabove in the appeal of the assessee for the assessment year 2005-06.

Following the same, we hold that the Assessing Officer was not justified in assessing the income of the assessee under sec. 115JB of the Act and not under the normal provisions of the Act during the year. The additional ground is accordingly allowed.

80 Ground NO.2: It is in relation to the depreciation on energy meters allowed at 15% as against 18% resulting in a disallowance of Rs.48,13,62,420. An identical issue under the similar set of facts has been decided hereinabove in ground No.1 of the appeal for the assessment year 2005-06 preferred by the assessee. Following the same, it is held that the assessee is eligible to claim depreciation on energy meters @ 80% and accordingly direct the Assessing Officer to allow the same on the basis of the expenditure incurred on electronic meters/energy meters reflected in the audit report. The ground No.2 is accordingly allowed for statistical purposes.

81.1. The Learned CIT(Appeals) held that since the assessee was not eligible for claiming accelerated depreciation @ 80% on the energy meters, no interference was required with the findings of the Assessing Officer.

81.2 Under similar set of facts and identical issue has been decided in favour of the assessee in the case of BSES Rajdhani Power Ltd. in the appeal preferred by the assessee for the assessment year 2006-07 hereinabove.

Following the same, we while setting aside orders of the authorities below in this regard direct the Assessing Officer to reduce grant in aid received by the assessee from the respective “cost of assets(s)” as reflected in the tax audit report of the assessee for the years as it has been rightly adjusted by the assessee and not against the meters and allow the claimed relief after affording opportunity of being heard. The ground No.3 is accordingly allowed for statistical purposes.

The learned CIT(A)-VI has upheld that the service line deposits are capital in nature but in this regard she has wrongly upheld that the same are taxable over a period of 3 years. In fact the same deserves to be reduced from the cost of plant and machinery in accordance with the provisions of Section 43(1) of the Income Tax Act, 1961.

2. Depreciation on energy meters wrongly allowed at 15% as against 80% resulting in a disallowance of Rs. 33, 28, 96,938.

The Ld.CIT(A)- VI has wrongly upheld that the “ Energy Meters ” are eligible for depreciation @ 15 % as against the claims @ 80

% . In this regard she has ignored the facts that these meters are for measuring electric energy which has been specifically mentioned as eligible for 80% depreciation in the depreciation schedule of the Income Tax Rules 1961. Further these meters also has the characteristics of energy saving device which is subject to depreciation @ 80%. In view of the above, depreciation allowed @ 15 % as against the 80% claim on energy meters resulting in a disallowance of Rs. 33,28,96,938 is wrong, against the facts of the case and unsustainable in the eyes of law.

3. Based upon the provisions of Section 2(18) of the Income Tax Act, 1961, applicability of the provisions of Section 2(22)(e) (pertaining to the taxability of deemed dividend of Rs. 59,27,00,000) has not been decided in the hands of the appellant company. The CIT(A)-VI erred in not deciding the applicability of Section 2(22)(e) (pertaining to the taxability of deemed dividend in the hands of the appellant) based upon the provisions of Section 2(18) of the Income Tax Act, 1961. In this regard it has been mentioned in the CIT(A) order that since the addition on account of deemed dividend had been deleted in the hands of the appellant (based upon the fact that appellant is not a shareholder of BRPL which provided loan to the appellant), the other arguments regarding the non-applicability of Section 2(22)(e) are only of academic nature and did not require specific adjudication. As BSES Rajdhani Power Ltd. (BRPL), a company which has provided the loan to the appellant company, is a company in which public is substantially interested by virtue of the provisions of Section 2(18) of the Income Tax Act, 1961, provisions of Section 2(22)(e) are not attracted on the amount of the loan / advance provided by BRPL to the appellant. 4. The appellant craves to leave, add, alter, modify, rectify, and amend all or any of the grounds before or at the time of hearing.

83.1. Besides above, the assessee has also moved an application for admission of the following additional ground:

“1. That on the facts and circumstances of the case and in law, the Assessing Officer erred in assessing the income of the appellant under sec. 115JB and not under the normal provisions of the Income-tax Act, 1961 (“the Act”), without appreciating that the deeming provisions of section 115JB of the Act were not applicable during the relevant assessment year.”

83.2 An identical issue after admitting the above additional ground has been decided in favour of the assessee hereinabove in the appeal for the assessment year 2005-06 with this finding that the Assessing Officer has erred in assessing the income of the assessee under sec. 115JB of the Act and not under the normal provisions of the Act. Following the same, the additional ground is decided in favour of the assessee.

The ground No.2 is accordingly allowed for statistical purposes.

2(22)(e) of the Act were not applicable to it. The Learned CIT(Appeals) while deleting the addition made by the Assessing Officer however, held that since the assessee is not a shareholder in BRPL(BSES Rajdhani Power Ltd.), the provisions of sec. 2(22)(e) will not be applicable by virtue of the decision of Special Bench of the ITAT in the case of ACIT vs. Bhaumik Colours (P) Ltd. – 118 ITD 1 (Mumbai) (SB). The parties are accordingly in appeal. The grievance of the assessee against the First Appellate Order is that based upon the provisions of sec. 2(18) of the Income-tax Act, 1961, applicability of the provisions of sec. 2(22)(e) of the Act (pertaining to the taxability of deemed divided of Rs.59,27,00,000 ) has not been decided in the hands of the assessee. The grievance of the Revenue on the other hand is that the Learned CIT(Appeals) has erred in deleting the addition of Rs.59,27,00,000 made on account of disallowance of deemed dividend under sec. 2(22)(e) of the Act ignoring that the Reliance Energy Ltd., Reliance Global Pvt. Ltd. are common shareholder in the assessee company as well as BSES Rajdhani Pvt. Ltd. from whom the assessee company has received loan and advances. The shareholding of Reliance Energy Ltd. and Reliance Global Pvt. Ltd. is also not less than 10%. We thus decided to deal with ground No.3 of the appeal of the assessee and ground No.4 of the appeal of the Revenue simultaneously.

86.1 Brief facts on the issue, case of the Assessing Officer, findings of the Learned CIT(Appeals) and contention of the assessee are as under:

86.2 In the assessment year under consideration the assessee-company received loan amounting to Rs.59,27,00,000 from M/s BSES Rajdhani Power Ltd.(‘BRPL’) The shareholding of the assessee-company as on 31.03.2007 was as under: Percentage of Name of Share Holder No. of shares Total Reliance Energy Ltd. 30,60,000 Reliance Energy Mgt. Service Pvt. Ltd 96,00,000 51% Reliance Energy Global Pvt. Ltd. 96,00,000 Powersurfer Interactive (I) Pvt. Ltd. 97,00,000 Delhi Power Co. Ltd. 5,68,39,997 Chief Secretary 1 49% Principal Secretary (Finance) 1 Principal Secretary (Power) 1 Total 11,60,00,000 100% Further, the shareholding of BRPL as on 31.03.2007 is tabulated as under: Percentage of Name of Share Holder No. of shares Total Reliance Energy Ltd. 11,97,00,000 Reliance Energy Mgt. Service Pvt. Ltd 3,83,00,000 51% Reliance Energy Global Pvt. Ltd. 3,83,00,000 Powersurfer Interactive (I) Pvt. Ltd. 3,83,00,000 Delhi Power Co. Ltd. 22,53,99,997 Chief Secretary 1 49% Principal Secretary (Finance) 1 Principal Secretary (Power) 1 Total 46,00,00,000 100% 86.3 On perusal of the aforesaid table, it may be noted that Reliance Energy Ltd. (REL) is one of the common-shareholder in the assessee as well as BRPL and held more than 26% shares in each of the companies in the assessment year under consideration. It may, however, be pertinent to note that the assessee did not have any direct shareholding in BRPL.

86.4 It may also be observed that 49% of the shares of BRPL are held by Delhi Power Co. Ltd., which is a Corporation set up under the Delhi Electricity Reform Act, 2000 (Delhi Act No2 of 2001), i.e. a State Act.

86.5 The assessing officer, in the impugned assessment order, held that the transaction of loan advanced by BRPL to the assessee was in the nature of ‘deemed dividend’ as defined under section 2(22)(e) of the Act.

86.6 In the impugned assessment order the assessing officer, despite admitting the fact that 49% of the shares of BRPL was held by Delhi Power Co. Ltd., which is a corporation set up under a State Act, proceeded to treat the amount of loan advanced as ‘deemed dividend’ by merely holding that there was no evidence to prove that the shares held by Delhi Power Co. Ltd. were allotted or acquired ‘unconditionally’.

86.7 On appeal against the aforesaid order of the assessing officer, the CIT(A) deleted the addition made by the assessing officer by holding that since the assessee-company did not have any direct share-holding in BRPL, the provisions of section 2(22)(e) of the Act were not applicable. The CIT(A), however, did not examine the fundamental question that the provisions of section 2(22)(e) of the Act were, per se, not applicable in the case of the assessee.

“(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [ made after the 31st day of May, 1987 , by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but" dividend" does not include— ……………….” (emphasis supplied) 87.1 On perusal of the aforesaid, it may be noted that the provisions of this clause are attracted to any payment made by a Company, not being a ‘company in which the public is substantially interested’ (as defined under section 2(18) of the Act, discussed infra) and the payments being in the nature of (1) advance; or (2) loan; or (3) any payment on behalf of any shareholder; or (4) any payment for the individual benefit of any shareholder. 87.2. In the present case, it is submitted that the provisions of section 2(22)(e) of the Act were not applicable in the case of the assessee at the very threshold as BRPL is a ‘company in which public is substantially interested’ as elaborated hereunder: 87.3 A Company in which public is substantially interested is defined under section 2(18) of the Act, which reads as under: (18) "company in which the public are substantially interested" -- a company is said to be a company in which the public are substantially interested-- (a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank; or ………………….. (b) if it is a company which is not a private company as defined in the Companies Act, 19569 (1 of 1956 ), and the conditions specified either in item (A) or in item (B) are fulfilled, namely:- (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 1 (42 of 1956 ), and any rules made thereunder; (B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by- (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. Explanation.- In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words" not less than fifty per cent", the words" not less than forty per cent" had been substituted;” (emphasis supplied) 87.4 On perusal of the aforesaid section, it may be noted that if fifty percent of shares a Company, not being a Private Company is held by: (1) the Government; or (2) Corporation established by a Central, State or Provincial Act; or (3) any company to which this clause applies; then such Company is considered to be a “company in which the public are substantially interested”, for the purposes of the Act. 87.5 Further, Explanation to the aforesaid section provides that in the case of an Indian company whose business consists mainly of distribution of electricity, then the words ‘not less than 50%’ shall be substituted with ‘not less than 40%’. 87.6 The Learned AR submitted that BRPL is a “company in which the public are substantially interested” as defined under section 2(18) of the Act, as elaborated hereunder: BRPL, was incorporated as a public company incorporated on 04.07.2001 and 49% of the shares of the said Company are held by Delhi Power Co. Ltd., a Corporation set up under the State Act of Delhi Electricity Reform Act, 2000 (Delhi Act No.2 of 2001). Further, it may also be noted that Delhi Power Co. Ltd., is a Company which is wholly held by the Government and hence a company in which public is substantially interested. 87.7 Thus, in view of the aforesaid facts, it is respectfully submitted that BRPL satisfies the conditions stipulated in both sub-clause (b) and (c) of section 2(18)(b)(B) of the Act as:

(i) more than 40% of its shares are held by Corporation set up under a State Act and;

(ii) more than 40% of its share is held by a Company which is held directly by the Government, 87.8 Accordingly provisions of section 2(22)(e) of the Act are not attracted at the threshold. 87.9 The assessing officer has, in the impugned assessment order, nowhere disputed the fact that 49% shares of BRPL are held by Delhi Power Co. Ltd., which is a Corporation set under a State Act, but has merely made a bald allegation that there was no evidence to prove that 49% shares of BRPL held by Delhi Power Co. Ltd. were allotted or acquired ‘unconditionally’ 87.10 In making the aforesaid observation, the assessing officer has not brought anything on record to establish that the aforesaid shares were not allotted or acquired ‘unconditionally’. 87.11 Without prejudice to the aforesaid, it is of utmost importance to note that section 2(22)(e) of the Act only deals with a payment to the shareholder directly and the payment by a Company not to a shareholder but to a third party on behalf of or for the individual benefit of the shareholder. 87.12 Thus, on the date of advancement of loan/advance, the recipient should be a shareholder and if it is not so established, the provisions of section 2(22)(e) of the Act are not applicable. Reliance in this regard is placed on the following decisions: − CIT vs. Ankitech (P.) Ltd.: 318 ITR 376 (Del) − CIT v. Universal Medicare (P.) Ltd. : 324 ITR 263 (Bom) − CIT vs. Suram Holdings (P.) Ltd.: 220 Taxman 327 (Raj.) − ACIT vs. Bhaumik Colour (P) Ltd.: 118 ITD 1 (MUM.) (SB) 87.13 In the instant case, the assessee did not have any ‘direct shareholding’ in BRPL in the assessment year under consideration and was therefore not a ‘shareholder’ in BRPL. 87.14. In view of the above, it is respectfully submitted, that the addition of Rs.59,27,00,000/- made by the assessing officer under section 2(22)(e) of the Act calls for being deleted.

i) More than 40% of its shares are held by Corporation set up under the State Act; ii) More than 40% its share is held by a company which is held directly by the government.

89.1 Accordingly provisions of sec. 2(22)(e) of the Act are not attracted at the threshold. The Assessing Officer nowhere disputed the fact that 49% shares of BRPL are held by Delhi Power Co. Ltd., which is a corporation set up under the State Act, but has held that there was no evidence to prove that 49% shares of BRPL held by Delhi Power Co. Ltd. were allotted or acquired unconditionally.

89.2 Before the Learned CIT(Appeals), the assessee has raised two contentions. Firstly, the BRPL who has provided loan/advance to the assessee is a company in which public is substantially interested by virtue of provisions of sec. 2(18) (b)(B)(c) of the Act, hence the provisions of section 2(22)(e) of the Act are not attracted on the amount of loan/advance provided by BRPL to the assessee. BRPL is a company which is not a private company within the meanings of the Company’s Act, 1956 and, therefore, qualifies as a company in which the public has substantial interest, since the below two conditions are also satisfied: (a) 40% of its shares are held by DPCL, a company to which section 2(18)(b)(B) applies, and (b) The above mentioned shareholding of BRPL was unconditionally allotted to and acquired by DPCL and was beneficially held by it throughout the relevant year.

89.3 Without prejudice to the above, the second contention of the assessee remained that the assessee company is not a shareholder in BRPL and accordingly cannot be taxed under sec. 2(22)(e) of the Act.

89.4 In support, reliance was placed on the decisions in the cases of ACIT vs. Bhaumik Colour (P) Ltd. (2009) – 313 ITR (AT) 146 (S.B) and DCIT vs. National Travel Services – 31 SOT 76. In view of the above cited decisions on the issue, the Learned CIT(Appeals) agreed with the alternative submissions of the assessee and held that the provisions of sec. 2(22)(E) will not be applicable in this case and directed the Assessing Officer to delete the addition. The Special Bench in the above cited decisions in the case of ACIT vs. Bhaumik Colour (P) Ltd. (supra) has held that deemed dividend can be assessed only in the hands of a person who is shareholder of the lender company and not in the hands of the person other than shareholder. Similar view has been expressed in the other cited decisions. Since the decision taken by the Learned CIT(Appeals) on the other alternative argument of the assessee is fully covered in favour of the assessee by the above cited decisions, we do not find reason to interfere with the First Appellate Order in this regard. The same is upheld. The ground No.4 of the Revenue’s appeal questioning the above finding is thus rejected.

89.5 The Learned CIT(Appeals) has, however, left open the above discussed first contention of the assessee, treating the same as turned academic in view of is above finding on the alternative contention of the assessee. The assessee is aggrieved with this non-action of the Learned CIT(Appeals).

By virtue of the provisions laid down under sec. 2(18)(b)(B)(c) of the Act, we principally agree with the contention of the assessee that provisions of sec. 2(22)(e) of the Act are not attracted, where the company, who provides loan/advance to the assessee, is a company in which public has substantial interest. In support, the assessee has also cited hereinabove the two conditions i.e. (a) (b) claimed to have been fulfilled in the present case, which our view need verification to decide the issue raised in ground NO.3 of the assessee. Since the Learned CIT(Appeals) has left the issue undecided, we in the interest of justice set aside the matter to the file of the Learned CIT(Appeals) to decide the issue after affording opportunity of being heard to the parties. The ground No.3 of the appeal preferred by the assessee is thus allowed for statistical purposes.

89.6 Thus, ground No.3 of the appeal of the assessee is allowed for statistical purposes and ground No.4 of the appeal filed by the Revenue is rejected.

4. “The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 51,22,43,735/- made on account of disallowance of service line deposits and customer contribution to capital works ignoring that: l) The service line deposits are not in the nature of deposits per se they are Non- refundable as also admitted by the assessee co.

m) Once these receipts have been accepted as non-refundable receipts they are no more a liability on the company. Hence the treatment given by the assessee co. to service line deposit by treating them as loan funds and accordingly as liabilities is all together incorrect. n) Further the assessee co. is engaged in selling electricity to the consumers from whom it charges fees in the name of energy charges. These energy charges are undisputedly in the nature of revenue receipts. o) The assessee co. is a service provider co. and is engaged in the business of distribution of electricity to different categories of customers as per their requirements. Hence it is in the nature of service provider. p) Since the assessee co. is engaged in selling the energy, therefore for this purpose it has to provide service line connections to the consumers for which it charges service line deposits. Hence it can be seen that these service line receipts are received by the co. during the course of its regular business/commercial operations. Hence, they are in the nature of revenue receipts. q) The reasoning given by the assessee co. that it incurs capital expenditure for extending service lines to the consumers and these receipts are utilized for this purpose does not explain that how these receipts are capital receipts in its hands. r) The fact that the assessee co itself treated 1/3rd of these receipts as revenue receipts impliedly, goes on to show that the co.believes that they are of revenue nature. s) Further the co. has not submitted any reasoning whatsoever as to why it has treated specifically 1/3rd of these receipts as revenue receipts and not ½ or 1/4th or some other proportion as revenue receipts. t) Lastly the assessee co. has not provided the details of these receipts including their reconciliation with its books even though specific query was raised in this regard vide not sheet entry dt. 21.11.2008. However a sample voucher of receipt was submitted which reveals that apart from service line charges, the co. is levying development charges from the customers for a new connection. Thus the co. is already collecting funds for incurring capital expenditure. u) The service line receipts simply cannot be treated as capital receipts because their nature would not depend upon how the assessee co. is utilizing them but in what capacity they have been received by the company. And the fact is that they have been received by the company. And the fact is that they have been received by the co. in the course of running its regular business operations. v) The assessee company also not provided the information in the tabular form inspite of specifically asked for by the AO during the Assessment proceedings.

The assessee on the other hand has raised a connected issue in ground No.1 of its appeal for the same assessment year questioning the First Appellate Order upholding the service line deposit from consumers as taxable over a period of three years. While deciding this issue hereinabove in the appeal of the assessee for the assessment year 2006-07, we have already dealt with both the connected grounds. Following the same, the finding of the Learned CIT(Appeals) that service line deposits and consumers contribution for capital works are capital in nature is upheld. The ground No.1 preferred by the Revenue is thus rejected.

“1. Service line deposits from the customers wrongly upheld as taxable over a period of 3 years.

The Learned CIT(Appeals)-VIII has upheld that the service line deposits are capital in nature but in this regard he has wrongly upheld that the same are taxable over a period of 3 years. In fact the same are in the nature of capital receipts and at the most can be reduced from the cost of plant and machinery in accordance with the provisions of sec. 43(1) of the Income-tax Act, 1961.

2. Depreciation on energy meters at 15% as against its eligibility of 80%. The Learned CIT(Appeals)-VIII has dismissed this ground mentioning that since appellant has claimed 15% depreciation on Energy Meters in the revised returns which has been allowed by the A.O. no cause of grievance arises. The company is in appeal before higher authorities on it’s claim of depreciation on energy meters @ 80% and in case the same is allowed, then the higher depreciation may be allowed. Accordingly the issue of higher deprecation @ 80% on energy meters still stands.

“That on the facts and circumstances of the case and in law, the Assessing Officer erred in assessing the income of the appellant under sec. 115B and not under the normal provisions of the Income-tax Act, 1961 (“the Act”), without appreciating that the deeming provisions of section 115JB of the Act were not applicable during relevant assessment year.”

98.1 The parties have adopted similar arguments as advanced by them on similar application in the appeal of the assessee hereinabove for the assessment year 2007-08. Following the same, the application is allowed.

The parties have also advanced a similar arguments on the issue raised on the additional ground as advanced by them in the assessment year 2007-08 in the appeal of the assessee. Following the same, we hold that the Assessing Officer was not justified in assessing the income of the assessee under sec.

115JB of the Act and not under the normal provisions of the Act during the year. The additional ground is accordingly allowed.

99.1 Under similar set of facts, we have decided the issue raised in this ground in the appeal of the assessee for the assessment year 2005-06 hereinabove. Following the same and the decision taken in the connected additional ground for the assessment year 2005-06 in the assessee’s appeal, we hold that the Learned CIT(Appeals) while holding the service line deposits from consumers as capital in nature should have directed the Assessing Officer to reduce the amount of service line deposits credited to the profit and loss account during the year (as per the company’s policy of offering the service line deposits for Revenue over a period of three years) by computing the total income after holding that entire receipts by way of service line deposits is capital in nature. We direct to the Assessing Officer accordingly. The ground No.1 is accordingly allowed.

Following the same, the issue is decided in favour of the assessee with this finding that the assessee is very much eligible for the claimed depreciation @ 80% on the energy meters with direction to the Assessing Officer to allow the claimed depreciation @ 80% on the expenses incurred on electronic/energy meters reflected in the audit report. The ground No. 2 is accordingly allowed for statistical purposes.