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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: Shri T.R. Senthil Kumar & Shri B.M. Biyani
आदेश/ORDER P5ER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:-
These two appeals are filed by the Revenue as against separate orders dated 04.09.2020 both passed by the Commissioner of Income Tax (Appeals)-2, Bhopal, as against the Assessment orders passed under section 143(3) r.w.s. 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Years (A.Ys) 2013-14 & 2014-15.
The brief facts of the case that the assessee is a Government Company engaged in the Hydro Electric Power Generation and has two power stations namely Indira Sagar Power Stations (ISPS unit) on (1000 MW) and Omkareshwar Power Station (OSPS unit) on (520MW). The assessee supplies power to Madhya Pradesh Power Management Co. Ltd. [beneficiary company] and recognized as a "generating station" u/s 2(30) of the Electricity Act, 2003 (herein after referred as Elec. Act) by the Central Electricity Regulatory Commission ("CERC"). The CERC u/s 62 read with section 79 of the Elec. Act is empowered to specify, by regulations, the terms and conditions for the determination of Tariff in accordance with the provisions of the said section. In exercise of powers conferred under the Elec Act, 2003, the CERC has notified the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regula tions, 2009 ("Tariff Regulations”) which were applicable on the assessee for the A.Y. 2013-14.
During the financial year 2012-13, the assessee materialized the Deferred Tax Liability (DTL) and Independent Auditor appointed by the CAG duly certified the same materialization. As per Regulation 39 of the Tariff Regulations was applicable on the assessee, the same is reads as follows:
"39. Tax on Income. Tax on the income streams of the generating company or the transmission licensee, as the case may be, shall not be recovered from the beneficiaries, or the long-term transmission customers, as the case may be.
Provided that the deferred tax liability, excluding Fringe Benefit Tax, for the period up to 31st March, 2009 whenever it materializes, shall be recoverable directly from the beneficiaries and the long-term customers."
In pursuance of the above regulation, the assessee created DTL which were to be paid in future period in respect of taxable temporary differences formed during the year due to the deprecation differences in the present case, and further generated bills in the subsequent years to recover the same from the beneficiary as and when it materialized in the books. Thus the assessee claimed deduction u/s 80IA of the Act for such DTL treating it as gross receipt towards the sale of power and directly deriving its source from the operating activity of the enterprise.
For the assessment year 2013-14, the assessee filed its Return of Income declaring total income at Rs.1,94,21,86,200/= and regular assessment was completed. That assessment order was subjected to Revision proceeding u/s.263 and de-novo assessment order passed by the Ld. AO whereIN a disallowance on account of DTL for Rs.30,58,04,134/- was made disregarding the explanation offered by the assessee that the DTL forms part of the 'Revenue from Operations' as per the Regulation 39 of the Tariff Regulations.
6. Aggrieved against the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). The Ld CIT(A) allowed the claim of deduction of Rs. 30,58,04,134/- being DTL eligible for deduction u/s. 80IA of the Act as sale of power as per terms of Regulation No. 39 of tariff regulation issued vide Central Electricity Regulatory Commission Notification No. 1-7/145(160)/ 2000-CERC dated 19.01.2009 as follows:
"7.1 I have carefully perused the content of the assessment order, submission of the appellant, it is seen that the current year sale included an amount of Rs. 30,58,04,134/- on account of deferred tax liability materialized. As per Section 80IA of the Act where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from business referred to in sub-section (4) (such business being here in after referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred percent of the profits and gains derived from such business for ten consecutive assessment year. It has been explained that the NHDC limited (A joint Venture of NHPC Limited and Government of Madhya Pradesh) is a Central Sector Power generating company. The Electricity Act, 2003 empowers the Central Electricity Regulatory Commission (CERC) to specify, by regulations, the terms and conditions for the determination of tariff in accordance with the provisions of the said section and the National Electricity Policy and Tariff Policy. In exercise of powers conferred under the Electricity Act, 2003 (36 of 2003), the Central Electricity Regulatory Commission has notified the tariff regulations vide notification dated 19/01/2009. The Tariff of Central Sector power generating Companies are notified by the Commission. The tariff and billing of Central Sector Power Generating Companies are fixed and billed as per principles and mechanics defined in the above regulation. Revenue from operations includes an amount of Rs. 30,58,04,134/- as sale of power as per terms of regulation No. 39 of tariff regulation issued vide Central Electricity Regulatory Commission (CERC) notification No. 1-7/145(160)/ 2000-CERC dated 19.01.2009 which inter-alia provides that deferred tax liabilities for the period up to 31st March 2009, whenever materialized, are recoverable directly from the beneficiaries and accounted for on yearly basis. Accordingly, it is seen that since the amount received is towards sale of power and is directly deriving its source from the operating activity that is sale of Power, the income so considered being eligible for 80IA (derived from eligible undertaking). Also, the amount is directly consequences of the appellant undertaking the business of generation of electricity. Hence, the amount is eligible for deduction U/S 80IA since, it flows from the same business activity. Since, the above amount is included in sales, this forms a part of operating Turnover. The Ld. A.O. has also not deliberated the specified reasons for not allowing the deduction U/s 80IA on this amount. It is mentioned that, the appellant failed to establish as to how deferred tax liability can be part of income derived from eligible business. However, further the AO relied on the case of Sterling Foods wherein duty drawback was claimed as income derived from eligible business. It is to be noted that section 28 (iiic) defines that in addition to the profits and gains of business and profession carried on by the assessee the compensation received by drawback scheme is also to be treated as business income. It is not disputable that the above income is earned by the assessee towards sale of power. The appellant is also reporting it as a operations meaning that the revenue is earned by the appellant from operating activities and the main operating activities of the undertaking is generation of part of revenue from power and the revenue is earned by authoritative directives of CERC, the Apex body for framing regulations for tariff of generating company. On further perusal of Tariff regulation, Copy of invoice raised, Copy of audited financial statements in which the explanatory notes attested by the auditors, it is clear that the amount forms part of sale of Power and is therefore directly attributable to operating activity. Therefore, the above amount of Rs. 30,58,04,134/- being deferred tax liability is eligible for deduction u/s 801A of the Act. This ground of appeal is allowed."
Aggrieved against the appellate order the Revenue is in appeal before us raising the following Grounds of appeal: On the facts and in the circumstance of the case:- “Whether in facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting addition of Rs. 30,58,04,134/- on account of deduction u/s 80IA disallowed on deferred tax liability, without examining the facts and findings of AO and relied upon various judgment.”
The Ld. CIT DR Shri. P.K. Mishra appearing for the Revenue submitted that the assessee is not eligible for deduction u/s.80IA on interest deposit account and on Deferred Tax Liability [DTL] without examining the facts, but the Ld. AO followed the directions given by the Ld. CIT u/s.263 of the Act. Thus Ld. DR prayed to uphold the order of the Ld.AO and allow the Revenue Appeals.
Per contra the Ld Counsel Mr. Ved Jain appearing for the assessee reiterated the submissions made before the CIT[A] that in pursuance of the Regulation 39 of the Tariff Regulations, the DTL amounting to Rs.30.58 crs. forms the part of "Revenue from operations” and is recoverable directly from the beneficiary whenever materializes. Further, the amount received from sale of power is being directly deriving its source from the operating activity of the power supply, therefore the profit from such inclusion is liable to deduction u/s.80IA of the Act. Further DTL is recognized as in the nature of an Income Tax as per the AS 12 and Tariff Regulations and similar issue came up before the Madras High Court in the case of M/s. Neyveli Lignite Corporation Ltd -Vs- ACIT in TCA No. 1317 of 2005, dated 16.07.2012 wherein the Hon'ble Court held that the tax component is very much part of the sale of electricity and mere fact that the tariff makes a reference to the tax liability does not make such income to be excluded in considering the relief under Section 80IA and the relevant portion of the judgment reads as follows:
"17. In the context of the direction issued in the notification dated 30.3.1992 and Clause 6 in the agreement, it is clear that tax liability is part of the tariff charged for sale of electricity from Thermal Power Generating Stations and it does not stand independent of the tariff charge. If the contemplation is otherwise, there is absolutely no need at all for anyone to enter into an agreement to make the tax liability of one party viz., the assessee as a liability to be borne by another party to the agreement. When the agreement between the parties is guided by the Notifications issued by the Ministry of Power, Government of India and the deliberations between the parties also pointed out the guidelines, under which the agreement themselves were entered into, we do not think there exists any justification in the contention of the Revenue to treat the tax payment shown under clause 6 of the agreement as an independent payment not connected with the tariff charged on the supply of energy. At the risk of repetition, we would say that the tax component is very much part of the sale of electricity from the Thermal Power Generating Stations and the mere fact that a component of the tariff makes a reference to the tax liability with reference to income streams mentioned in clause 6, it does not make such a component as not income to be excluded in considering the relief under Section 801A/80IB. In the circumstances, we hold that there is no such reimbursement of tax paid by NLC from the State Electricity Board. On the other hand the tariff component is quantified in terms of the liability met by the NLC which by no stretch of imagination could convert such a payment by the recipient as a tax liability of the recipient.
In the circumstances, we have no hesitation in accepting the plea of the assessee that the Commissioner committed serious error in dissecting the tariff to come to the conclusion that the tax component specified as part of the tariff is reimbursement of the liability of the assessee and hence it would not form part of the income. As already pointed out, when the Revenue had not questioned the genuineness of the agreement between the parties and liberty is thus available for the parties to arrive at the cost of the energy to be supplied by the assessee as guided by the notifications of the Ministry of Power in this regard, we find no ground to sustain the plea of the Revenue that the relief to be granted under Section 801A calls for exclusion of the tax component in the sale price of electricity. Consequently, the first question raised in the tax case is answered in favour of the assessee and the order of the Tribunal is set aside."
10. The Ld Counsel further submitted that this judgement was followed by Hon’ble Madras High Court in the case of NLC in TCA Nos. 779 and 780 of 2009 vide dated 26 November 2018 (Relevant Para 5 & 6) are as follows: "5. It is not in question that the order of the High Court dated 16.7.2012 has attained finality and has also been followed while deciding the identical issue for the intervening assessment year, i.e., assessment year 2002-2003. Moreover, in respect of the present two assessment years, the orders of the first and second appellate authorities have been passed in 2008 prior to this court's decision dated 16.7.2012.
In the light of the above, we answer the question of law in favour of the assessee and against the Revenue. The Tax Case (Appeals) are allowed."
11. The Ld Counsel further relied upon similar findings of the CERC order dated 07-02-2021, in the case of NHPC Ltd. v. Punjab State Power Corporation Ltd. in Petition No. 294/MP/2019, wherein the issue was regarding the payment of 'DTL Materialized during the F.Y. 2017-18.
I. The brief facts of the case were that the Respondent issued objections on the issue of "grossing up' of the DTL where the DTL was for the period upto 2009 and materialized in FY 2017-18. The Petitioner relied on the opinion of Expert Advisory Committee of the Institute of Chartered Accountants of India ("EAC of ICAI) and the industry practices to contend that the DTL is recovered from the beneficiary after grossing-up through sales, CERC in the above matter observed the following:
“50. It is pertinent to mention that Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI) in its opinion has clarified that in case the burden on account of income tax is passed on to the customers, it is in the form of recovery of any other expense of the enterprise in the form of a consideration to sell its products or render services and, therefore, the recovery of income tax from the customers should form part of gross inflow on account of sale of the product or rendering of services. EAC of ICAI finally opined that netting off of recovery of income tax from Electricity Boards against the income tax provision is not in order and that the said recovery should form part of the revenue of the company which means that the income tax has to be grossed up while recovering from the beneficiaries."
12. Reliance is also placed on the opinion of the EAC of the ICAI dated 14.04.2001 (available at Paper Book Page No. 259, paras 9- 12), the relevant extract of the opinion is reproduced as follows:
"9. The Committee notes that Accounting Standard (AS) 9, 'Revenue Recognition" defines revenue as "the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them". The Committee further notes that the 'Guidance Note on Terms Used in Financial Statements, issued by the Institute of Chartered Accountants of India, apart from the aforesaid definition of revenue, also states that revenue excludes amounts collected on behalf of a third party such as certain taxes (paragraph 14.06)
The Committee is of the view that the taxes such as sales tax and entertainment tax are collected on behalf of a third party, viz, the government and accordingly such taxes are excluded from revenue. The intention of the corresponding legislation is to recover such taxes from customers. In other words, the enterprise is a conduit through which government collects these taxes from the customers
The Committee notes that the income tax, being a direct-tax, is a charge on the enterprise's income and has to be borne by the enterprise self in case the burden on account of income tax is passed on to the customers, it is in the form of recovery of any other expense of the enterprise in the form of a consideration to sell its products or render services and, therefore, the recovery of income tax from the customers should form part of gross inflow on account of sale of the product or rendering of services.
On the basis of the above, the Committee is of the opinion that netting off of recovery of income tax from Electricity Boards against the income tax provision is not in order. The said recovery should form part of the revenue of the company."
Thus, the Ld. Counsel submitted that the CIT(A) has deleted the additions made by the AO and rightly held that the assessee company is eligible for deduction u/s 80IA of the Act on account of Deferred Tax Liability of Rs.30,58,04,134/- being a revenue from operation recoverable from the beneficiary company. Therefore the Revenue appeals are liable to be dismissed.
We have given our thoughtful consideration and perused the materials available on record. The solitary issue is to be decided in this case whether the Ld. CIT(A) is justified in deleting the addition of Rs. 30,58,04,134/- on account of deduction u/s. 80IA disallowed on Deferred Tax Liability. During the financial year, the assessee materialized the DTL which was duly certified by Independent Auditor appointed by the CAG. As per Regulation 39 of the Tariff Regulation issued vide Central Electricity Regulatory Commission Notification No. 1-7/145(160)/2000-CERC dated 19.01.2019 which provides that Deferred Tax Liabilities for the period up to 31st March 2009, whenever materialized are recoverable directly from the beneficiaries and accounted for on yearly basis. Accordingly, the amount of Rs. 30,58,04,134/- received as sale of Power and directly deriving its source from the operating activity of power generation. Thus no doubt the assessee is eligible for deduction u/s. 80IA of the Act. Further the amount is included in sales, this forms a part of operating Turnover. Thus the Assessing Officer completely ignored the Tariff Regulation and the Notification issued by CERC and denied the benefit of DTL to the assessee. However the Ld. CIT(A) after considering the CERC Regulation allowed the benefit in favour of the assessee. This issue is now settled by Hon’ble High Court of Madras in the case of Neyveli Lignite Corporation Ltd. (cited supra). Thus the findings of the Ld. CIT(A) that the assessee company is eligible for deduction u/s. 80IA of the Act on account of DTL being a Revenue from operation recoverable from the beneficiary company. Thus the grounds raised by the Revenue is devoid of merits and the same is liable to be dismissed.
In the result, the appeal filed by the Revenue is hereby dismissed. for Asst. Year 2014-15:
For the assessment year 2014-15, the assessee filed its Return of Income declaring total income at Rs.1,64,65,50,320/= and regular assessment was completed. That assessment order was subjected to Revision proceeding u/s.263 and de-novo assessment order passed by the Ld. AO wherein disallowed Rs.39,50,987/= claimed as deduction as business expenditure and also disallowed the deduction u/s.80IA of Rs.34,74,84,294/= on account of Deferred Tax Liability.
Aggrieved against the giving effect order, the assessee filed an appeal before the Ld Commissioner of Income Tax (Appeals). The Ld CIT(A) after considering the submissions and documents on record has deleted the addition holding as under: "I have carefully perused the content of the assessment order. Submission of the appellant, it is seen that all the supporting and documents are appellant is a Government Company and is subject to audit and all checks and balances as per norms. Further during appellate proceedings the supporting along placed on record. The with vouchers has been provided. The deduction claimed by the appellant towards deduction of Rs. 39,50,987/- against non 80IA income and disallowed by AO an account of insufficiency of supports and proofs. However, the documents were placed on record. Further, AO during discussion has concluded that these are income not derived from eligible business and hence did not qualify for deduction benefit u/s 80IA. Relying on fast axiom of AO (in precedence to the 2 line of discussion), is factually incorrect. On careful examination of the income from other sources for the assessment year 2014-15, it was observed that the appellant has earned interest income amounting to Rs. 1,65,05,10,307 Further, in order u/s 143(3) dated 09.12.2016 the total income has been computed at Rs. 2,30,79,48,320/- by making an addition of Rs. 65,96,21,952/- on account of interest and other income including income which is derived from business. Considering the additions made and escalation of income on account of other income pertaining to business and submission of details of expenditure, the deduction needs to be allowed being business expenses claimed against non 80IA income. This ground of appeal is allowed."
18. Further the CIT(A) has deleted the additions made by the AO and that the assessee company is eligible for deduction u/s 80IA of the Act on account of Deferred Tax Liability of Rs.34,74,84,294/- being a revenue from operation recoverable from the beneficiary company.
Now the Revenue is in appeal before us raising the following Grounds of Appeal: On the facts and in the circumstance of the case:- “(1) Whether in the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting addition of Rs. 39,50,987/- on account of deduction u/s 80IA disallowed on interest on deposit account other than self-insurance fund, without examining the facts and findings of AO and relied upon various judgment. (2) Whether in facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting addition of Rs. 34,74,84,294/- on account of deduction u/s 80IA disallowed on deferred tax liability, without examining the facts and findings of AO and relied upon various judgment.”
The Ld. CIT-DR appearing for the Revenue supported the order passed by the Assessing Officer and pleaded to uphold the same and thereby allow the Revenue appeal.
Per contra, the Ld. Counsel appearing for the assessee submitted that it is not doubted by the AO that the expenditure incurred by the assessee are not allowable under section 37(1) of the Act. Further it is not the case of the AO that these expenditures are related to the income on which deduction under section 80IA has been claimed. The only issue with the AO is that the interest income earned by the assessee is Rs. 1,65,05,10,307/- whereas the assessee has offered the tax on the income of Rs. 1,64,65,50,320/- and hence there is a difference of Rs. 39,50,987/-. However the CIT(A) has rightly appreciated the facts that the assessee is the government company and is subject to audit and all checks & balances as per norms of CAG. Thus the Ld. CIT(A) deleted the disallowance after taking into account that these expenses have been incurred for earning the non 80IA income and hence are allowable business expenditure, which finding does not require any interference.
We have given our thoughtful consideration and perused the materials available on record. The findings made by the Ld. CIT(A) is not contravented by the Ld. CIT-DR with any materials. The assessee company has incurred legitimate business expenditure of Rs. 39,50,987/- towards new business avenue exploration and community development expenses under Corporate Social Responsibility programme for other than 80IA locations. As these expenses not pertaining to 80IA units, the same are eligible for deduction u/s. 37(1) of the Act and therefore eligible for deduction in computing the total income of the assessee. We do not find any infirmity on the findings of Ld. CIT(A), therefore we uphold the same. Thus the ground no. 1 raised by the Revenue is devoid of merits and the same is liable to be dismissed.
The second ground namely deletion of Rs. 34,74,84,294/- on account of deduction u/s. 80IA disallowed on Deferred Tax Liability. This issue is already decided against the Revenue in by this common order. Respectfully following the same ratio specially when there is no change in facts of the case. Thus the Ground raised by the Revenue is hereby dismissed.
In the result, both the appeals filed by the Revenue are dismissed.
Order pronounced as per Rule 34 of I.T.A.T. Rules, 1963/open court on 16/05/2023.