IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT:- THE HONOURABLE THE CHIEF JUSTICE MR.J.CHELAMESWAR & THE HONOURABLE MR. JUSTICE P.R.RAMACHANDRA MENON FRIDAY, THE 12TH NOVEMBER 2010 / 21ST KARTHIKA 1932 I.T.A.No.1703 of 2009 ---------------------------------- AGAINST THE ORDER IN I.T.A.No.110 (Coch)/2006 DATED 03.04.2009 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN (ASSESSMENT YEAR 2002-03) .................... APPELLANT/RESPONDENT IN ITA:- ----------------------------------------------------- KERALA STATE ELECTRICITY BOARD, VYDYUTHI BHAVAN, PATTOM, THIRUVANANTHAPURAM. BY ADV. SRI.E.K.NANDAKUMAR SRI.A.K.JAYASANKAR NAMBIAR SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS RESPONDENT/APPELLANT IN ITA:- ------------------------------------------------------ DY. COMMISSIONER OF INCOME TAX, CIRCLE 1 (1) THIRUVANANTHAPURAM. BY STANDING COUNSEL FOR INCOME TAX SHRI.JOSE JOSEPH THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 01/11/2010, ALONG WITH I.T.A.NO.1710 OF 2009 AND CONNECTED CASES, THE COURT 12/11/2010 DELIVERED THE FOLLOWING:- ORDER ON I.A.NO.834 of 2010 in I.T.A.No.1703 of 2009 DISMISSED. Sd/- J.CHELAMESWAR, CHIEF JUSTICE. 12/11/2010 Sd/- P.R.RAMACHANDRA MENON, JUDGE. - TRUE COPY - J. CHELAMESWAR, C.J. & P.R. RAMACHANDRA MENON J. ------------------------------------------------------ I. T Appeal Nos. 1703 of 2009, 1710 of 2009, 1716 of 2009 and 127 of 2010 ------------------------------------------------------ Dated, this the 12th day of November, 2010 JUDGMENT J. Chelameswar, C.J. These four appeals under Section 260A of the Income Tax Act 1961 are preferred by the Kerala State Electricity Board, a statutory corporation constituted under Section 5 of the Electricity Supply Act 1948, aggrieved by the orders of the Income Tax Appellate Tribunal, Cochin Bench. The dispute pertains to four assessment years viz. 2002-03 to 2005-06. The facts of the four appeals are similar; therefore, we state the facts in I.T. Appeal No. 1703 of 2009 corresponding to the assessment year 2002-03. 2. For the said assessment year, the appellant filed return declaring the current loss at `411,56,63,704/-. The return was subsequently revised and loss reduced to `203,81,27,595/-. The assessment was made under Section 143 (3) of the Income Tax Act. The assessing authority made substantial additions to the income return filed by the appellant and disallowed certain claims of the appellant. 3. It may be mentioned herein that the dispute revolves mainly around certain amounts collected by the appellant, pursuant to the statutory obligations created under Section 5 of the Kerala State I.T.A.No.1703 of 2009 & - 2 - connected cases. Electricity Duty Act, 1963. Under Section 4* of the said Act, a duty is levied on the consumers of electricity specified in column (2) of the Schedule. Under Section 5**, the appellant is obliged to collect from ----------------------------------------------------------------------------------------------------------------- *Sec.4. Levy of electricity duty on consumers.- Every consumer belonging to any of the classes specified in column (2) of the Schedule shall pay every month to the Government in the prescribed manner a duty calculated at the rate specified against that class in column (3) thereof: Provided that in cases where the supply of energy to a consumer is regulated by an agreement entered into between the Government or the licensee and the consumer it shall be competent for the Government either to reduce the rate at which duty is leviable on such consumer or to exempt such consumer from payment of duty under this section subject to, such terms and conditions as may be imposed by the Government. **Sec.5. Collection and payment of electricity duty levied on consumers.- (1) Every licensee shall collect and pay to the Government at the time and in the manner prescribed, the electricity duty payable under Section 4 of this Act on the units of energy consumed by every consumer to whom energy is supplied by him. The duty so payable shall be a first charge on the amounts recoverable by the licensee for the energy consumed, and shall be a debt due by him to the Government. (2) When any consumer fails or neglects to pay at the time and in the manner prescribed, the amount of electricity duty due from him, the licensee may, without prejudice to the right of the Government to recover the amount under Section 8, after giving not less than seven clear days' notice in writing to such consumer, cut off supply of energy to such consumer; and he may, for that purpose, exercise the power conferred on a licensee by sub-section (1) of Section 34 of the Indian Electricity Act, 1910, for the recovery of any charge or sum due in respect of energy supplied by him. I.T.A.No.1703 of 2009 & - 3 - connected cases. the consumer the above mentioned duty and pay to the Government at the time and in the manner as prescribed by Rule. Further details of the Scheme of the said Act may not be necessary for the purpose of deciding this appeal. 4. It appears, for the assessment year 2002-03, the appellant collected an amount of `125,19,23,805/- from the various consumers (of the electricity supplied by the appellant) the duty payable under Section 4 of the Kerala State Electricity Duty Act. But, the amount admittedly remained in the hands of the appellant by the date of assessment, though under Section 4, the amount is required to be paid to the Government. It is the case of the appellant that under an agreement between the State of Kerala and the appellant, the appellant is entitled to retain 1% of the total amount collected from the consumer pursuant to Section 4 of the above mentioned Act to enable the appellant to meet the expenditure involved in collecting the tax and the balance is liable to be paid to the State. The learned counsel for the appellant submits that such balance amount is either actually paid to the Government or adjusted in the accounts between the State and the appellant. The details of which may not be necessary for the purpose of the present appeal. 5. As already mentioned, the facts of each of the other appeals are also similar, except the dates and amounts vary from year to year. In view of the fact that the assessing authority made certain additions to the income returned by the appellant and disallowed certain I.T.A.No.1703 of 2009 & - 4 - connected cases. claims, the appellant carried the matter in appeals (aggrieved by the said assessment orders) before the Commissioner of Income Tax, Thiruvananthapuram. The appeals were allowed. Aggrieved by such appellate orders, the Revenue carried the matter before the Income Tax Tribunal successfully. Hence the instant appeals by the assessee. 6. The legal controversy in this appeal (I.T. Appeal No. 1703 of 2009) is as follows: (1) The assessing authority invoked the legal fiction under Section 115JB of the Income Tax Act, which enables the revenue to arrive at fictitious conclusion regarding the total income of the assessee and assess the tax on such total income. (2) The assessing authority relying upon Section 43B of the Income Tax Act, rejected the claim of the assessee that the amount collected by the assessee from the consumer under Section 5 of the Electricity Duty Act, is not the income of the assessee and consequently not exigible to tax under the provisions of the Income Tax Act. Though, the first appellate authority accepted the submission of the assessee on the above mentioned two questions of law, the Tribunal by the order under appeal confirmed the views of the assessing authority in rejecting the claim of the appellant. 7. The appellant is a statutory corporation constituted by the notification of the State of Kerala, pursuant to the powers vested in it by virtue of Section 5 of the Electricity Supply Act 1948. Section 12 of the said Act, declares that the appellant to be a body corporate having perpetual succession and a common seal, with power to acquire and hold I.T.A.No.1703 of 2009 & - 5 - connected cases. property both movable and immovable, capable of suing and being sued by the name specified in the notification issued under Section 5 of the said Act. Section 80 of the Act, declares that the appellant shall be deemed to be a company within the meaning of the Income Tax Act, 1922 and further declares that the appellant is liable to pay income tax and super- tax on its income, profits and gains. Section 80 reads as follows: “80. Provision relating to income tax and super-tax -- (1) For the purposes of the Indian Income Tax Act, 1922 (11 of 1922), the Board shall be deemed to be a company within the meaning of that Act and shall be liable to income tax and super-tax accordingly on its income, profits and gains. (2) The State Government shall not be entitled to any refund of any such taxes paid by the Board”. The Income Tax Act, 1922 came to be repealed by Section 297(1) of the Income Tax Act 1961. Therefore, by virtue of operation under Section 18 of the General Clause Act, 1897, reference to Income Tax Act 1922 in Section 80 of the Electricity Supply Act shall be understood to be reference to Income Tax Act 1961. 8. Section 4 Income Tax Act 1961 creates a charge of tax on the total income of every person. The expression “person” is defined under Section 2(31) of as follows: “(31) “person” includes -- (i) an individual, I.T.A.No.1703 of 2009 & - 6 - connected cases. (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses”. It can be seen from the said definition that it includes a company and every artificial juridical person along with others. The expression “company” itself is defined under Section 2 (17) as follows: “(17) “company” means -- (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company: Provided that such institution, association or body shall be deemed to be a company only for such assessment year of assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration;” I.T.A.No.1703 of 2009 & - 7 - connected cases. The expression of “Indian Company” occurring in the above definition is itself under Section 2 (26) as follows: “(26) “Indian Company” means a company formed and registered under the Companies Act, 1956 (1 of 1956) and includes -- (i) a company formed and registered under any law relating to companies formerly in force in any part of Indian (other than the State of Jammu and Kashmir [and the Union territories specified in sub-clause (iii) of this clause]); [(ia) a corporation established by or under a Central, State or Provincial Act; (ib) any institution, association or body which is declared by the Board to be a company under clause (17);] (ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State; [(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory:] Provided that the [registered or, as the case may be, principal office of the company, corporation, institution, association or body] in all cases is in India”. 9. It can be seen from the above definitions; more particularly in Section 2(26) clause (ia) that the appellant answers descriptions of the expression of an Indian Company and therefore a company within the meaning of Section 2(17). Admittedly the appellant was being assessed as a company under the provisions of the Income Tax Act 1922. I.T.A.No.1703 of 2009 & - 8 - connected cases. Therefore, irrespective of the fact whether it is an Indian Company or not by virtue of the operations under clause 3 of Section 2(17), the appellant is a company for the purpose of Income Tax Act 1961. Even otherwise, as we have already noticed, since Section 80 of the Electricity Supply Act, makes a positive declaration that the appellant is a company for the purpose of Income Tax Act, it is liable for the assessment under the various heads of tax, provided under the Income Tax Act from time to time. 10. The two questions of law which require an examination in these appeals are - (i) whether Section 115 JB is applicable to the appellant herein; and (ii) whether Section 43B of the Income Tax Act is legally invocable on the facts and circumstances of the case. 11. Before we examine the first question a brief survey of the history of Section 115JB is necessary. Chapter XII-B was inserted by the Finance Act of 1987 in the Income Tax Act. Section 115J was introduced for the first time by the said Chapter. The relevant portion of the said Section reads as follows: “S.115J. Special provisions relating to certain companies.- (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed I.T.A.No.1703 of 2009 & - 9 - connected cases. under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) Explanation.- For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A), as increased by - xxx xxx xxx if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not credited to the profit and loss account, and as reduced by, - xxx xxx xxx”. It can be seen from clause (1) that the provision creates a legal fiction regarding the total income chargeable to tax. Such a fiction is applicable only to those assessees which - (a) are Companies except the Companies engaged in the business of either generation or distribution of electricity, (b) that such a fiction is made applicable to the Companies only with reference to the previous year relevant to the assessment year commencing after 1st April, 1988 and ending with the 1st April, 1991, (c) I.T.A.No.1703 of 2009 & - 10 - connected cases. the “total income” of the Company as computed under the Act is less than thirty per cent of its “book profit”. The fiction being that the total income for the purpose of assessment shall be deemed to be 30% of the book profit. In other words, the Section prescribes 30% of the book profits of those Companies falling within the purview of the Section shall be treated as the total income of the Company for the purpose of income tax, irrespective of the fact that according to the accounts of the Company the “total income” is less than thirty per cent of the book profit. The expression “book profit” itself is explained in the Section as meaning, the net profit as shown in the profit and loss account for the relevant previous year prepared as per the prescription under sub-section (1A) and either increased or decreased by various amounts specified in the various subsequent sub-clauses appended to the Explanation, the details of which are not necessary for the purpose of this case. However, the operation of Section 115J came to an end with 1991-92 assessment year onwards. 12. Subsequently, Section 115JA came to be inserted in the Income Tax Act by Finance Act 2 of 1996, with effect from 1.4.1997. The scheme of Section 115JA is almost similar to the scheme of Section 115J. Two major points of difference are that the new Section is applicable with reference to the previous year relevant to the assessment year commencing from 1st April, 1997 and ending with 1st April, 2001. Secondly, the express exclusion of the Companies engaged in the business of either generation or distribution of electricity is absent under Section I.T.A.No.1703 of 2009 & - 11 - connected cases. 115JA. The third and most important change is that two provisos are added to sub-section (2) stipulating that - “Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation or depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year”. The further details of Section 115JA may not be necessary for the present purpose. 13. Then came to Section 115JB, which was inserted in the Income Tax Act by Finance Act of 2000 with effect from 1.4.2001. The relevant portion as it stands today reads as follows:- “115JB. Special provision for payment of tax by certain companies.- (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the I.T.A.No.1703 of 2009 & - 12 - connected cases. assessment year commencing on or after the 1st day of April, 2007 is less than ten per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of ten per cent. (2) Every assessee, being a company shall for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies; (ii) the accounting standards followed for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year failing within the relevant previous year”. I.T.A.No.1703 of 2009 & - 13 - connected cases. The scheme of the Section 115JB is similar to Section 115J and Section 115JA. The difference in so far as it is relevant for the present purpose between Section 115JB and its fore-runners (Sections 115J and 115 JA) is as follows: All the 3 Sections (Ss.115J, 115JA and 115JB) create legal fictions regarding the 'total income' (a defined expression under Section 2(45)of the Act) of the Companies. While the earlier two sections mandate the department to make the assessment on a fictitious amount of 'total income' where the actual amount of total income computed in accordance with the I.T Act is less than 30% of the book profits of the Company, Section 115JB mandates the department to resort to the fiction in those cases where the tax payable on the basis of the 'total income' computed in accordance with the I.T.Act is less than a specified percentage (7½% for the years in issue) of the book profit. Further, Sections 115JA and 115JB also stipulate a definite manner of preparing the annual accounts including the profit and loss accounts. More specifically, Section 115JB stipulates that the accounting policies, accounting standards, etc. shall be uniform both for the purpose of income tax as well as for the information statutorily required to be placed, before the annual general meeting conducted, in accordance with Section 210 of the Companies Act, 1956. I.T.A.No.1703 of 2009 & - 14 - connected cases. 14. It may be mentioned here that under Section 166 of the Companies Act every Company is mandated to hold a general meeting in each year. Section 210 mandates that every year the Board of Directors of the Company in the general meeting shall lay before the Company a balance sheet as at the end of the relevant period and also a profit and loss account for the period. Parts II and III of Schedule VI to the Companies Act specify the method and manner of maintaining the profit and loss account. 15. However, the appellant though is by definition a Company under the Income Tax Act and deemed to be a Company for the purpose of Income Tax Act, (by virtue of the declaration under Section 80 of the Electricity Supply Act) it is not a Company for the purpose of Companies Act. Therefore, the appellant is not obliged to either to convene an annual general meeting or place its profit and loss account in such general meeting. As a matter of fact, a general meeting contemplated under Section 166 of the Companies Act is not possible in the case of the appellant as there are no share holders for the appellant Board. On the other hand, under Section 69 of the Electricity Supply Act, the appellant is obliged to keep proper accounts, including the profit and loss account, and prepare an annual statement of accounts, balance sheet, etc. in such form as may be prescribed by the Central Government and notified in the official gazette. The prescription of the rules in this regard is required to be made in consultation with the Comptroller and Auditor-General of India I.T.A.No.1703 of 2009 & - 15 - connected cases. and also the State Governments. Such accounts of the appellant are required to be audited by the Comptroller and Auditor-General of India or such other person duly authorised by the Comptroller and Auditor-General