ITA No. 1187/2005 Page 1 of 26 * THE HIGH COURT OF DELHI AT NEW DELHI Judgment reserved on : 03.10.2008 % Judgment delivered on : 21.11.2008 ITA 1187/2005 COMMISSIONER OF INCOME TAX DELHI-IV, NEW DELHI ..... Revenue -versus- M/S DCM SRIRAM CONSOLIDATED LTD ..... Respondent Advocates who appeared in this case: For the Revenue : Ms Prem Lata Bansal For the Respondent : Mr M.S.Syali, Sr.Advocate with Mr V.P.Gupta, Mr Aseem Mowar and Mr Basant Kumar, Advocates CORAM :- HON'BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR JUSTICE RAJIV SHAKDHER 1. Whether the Reporters of local papers may be allowed to see the judgment ? 2. To be referred to Reporters or not ? 3. Whether the judgment should be reported in the Digest ? RAJIV SHAKDHER, J 1. The Revenue has preferred the present appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ―the Act‖) against the judgment of the Income Tax Appellate Tribunal (hereinafter referred to as the ―Tribunal‖) dated 02.05.2005 passed in ITA No. 1400/Del/2001, in respect of, assessment year 1997- 98. ITA No. 1187/2005 Page 2 of 26 1.1 In the appeal the Revenue has raised two issues which impact the computation of Minimum Alternate Taxation (hereinafter referred to as MAT) under Section 115JA of the Act. These being :- 1. Whether provision for bad and doubtful debts amounting to Rs 1.01 crores was to be added back to the net profit while computing book profit under Section 115JA of the Act in view of Explanation (c) to Section 115JA(2)? 2. Whether Income Tax Appellate Tribunal was correct in law in reducing the amount of Rs 41.88 crores allegedly claimed by the assessee as profit from business of generation of power while computing book profit under Section 115JA of the Act? 1.2 As far as the first issue is concerned, the same is no longer res integra as it is covered by the judgment of this Court in Commissioner of Income Tax v. Eicher Ltd; 287 ITR 170 (Del), as well as, that of the Supreme Court in the case of Commissioner of Income Tax-IV, Delhi vs M/s HCL Comnet Systems & Services Ltd ; Civil Appeal No 5800 of 2008 vide judgment dated 23.09.2008. In respect of the second issue, we have framed a question of law, by our order dated 03.10.2008. The question of law framed by us is as follows:- ―Whether the Income Tax Appellate Tribunal was correct in law in allowing the assessee‘s claim of alleged profits derived by the assessee from the business of generation of power while computing the book profits under Section 115JA of the Income Tax Act, 1961, particularly when the electricity power generated was entirely for captive consumption?‖ ITA No. 1187/2005 Page 3 of 26 1.3 In order to answer the question framed by us, it would be helpful if we were to note the factual background, in which, the issue has arisen for consideration before us:- 1.4 The assessee has four divisions namely Shriram Fertilisers and Chemicals, Shriram Cement Works, Shriram Alkalies and Chemicals and the textile division. In addition, the assessee also has four industrial undertakings which are engaged in captive power generation [hereinafter referred to as ‗CPP(s)‘]. Three out of the four CPPs are situated at Kota, which generate power equivalent 10 MW, 30MW and 35MW respectively. The fourth CPP, at Bharuch, which is situate in the State of Gujarat, generates 18 MW power. For the purposes of setting up CPPs the assessee has taken requisite permission from the Rajasthan State Electricity Board (hereinafter referred to as ‗RSEB‘), as well as, the Gujarat State Electricity Board (hereinafter referred to as ‗GSEB‘). These permissions have been referred to by the authorities below. A reference in this regard has been made to the orders issued by the RSEB dated 23.4.1967, 18.6.1982 and 16.21993 and the orders of GSEB dated 22.11.1995 as modified by its letter dated 31.1.1996. 1.5 It is in this background that on 29.11.1997 the assessee had filed a return declaring a loss of Rs 43,31,74,077/-. It is important to bring to the fore at this stage that, in a note attached to the return the assessee had disclosed the profit and loss derived from each of the CPPs, and also, indicated the formula adopted for ITA No. 1187/2005 Page 4 of 26 computation of the profit derived from the respective CPPs. Briefly, the method for computation of profit and loss indicated in the note appended to the return was-the rate per unit as charged by the respective State Electricity Board for transfer of power, reduced by 7%, on account of absence of transmission and distribution losses (wheeling charges). From the figure obtained by applying the reconfigured rate per unit, deduction was made towards specific expenses, as well as, common expenses attributable to each CPP so as to arrive at the figure of profit/loss of each CPP. In the note appended to the return of the assessee the break up of total profit in the sum of Rs41,88,50,862/- is detailed out in the following manner:- Captive Power Plant Units generated Profit derived Kota 35 MW 18,41,17,747/- 30 MW 19,26,70,899/- 10 MW 7,70,25,351/- Bharuch 18 MW (-) 3,49,63,135/- Total profit from generation of power 41,88,50,862/- 1.6 The assessee, however, for the purposes of provisions of Section 115JA of the Act based on its books of accounts, disclosed income in the sum of Rs 86,33,382/-. By an intimation dated 07.07.1998, the Revenue processed the return filed by the assessee under the provisions of Section 143(1)(a) of the Act. On 30.3.1999, the assessee filed revised return declaring a loss of Rs 39,36,71,056/-. Interestingly ITA No. 1187/2005 Page 5 of 26 though, for the purposes of Section 115JA of the Act, the assessee continued to show its income as Rs 86,33,382/-. The case of the assessee was taken up by the Assessing Officer for scrutiny. A notice under Section 143(2) of the Act was issued. During the course of scrutiny, the Assessing Officer raised a query with regard to the deduction of a sum of Rs 41,88,50,862/- from book profit by the assessee while, computing tax under Section 115JA of the Act. In response to the query of the Assessing Officer, the assessee informed that the said amount has been reduced from the book profit as this amount was profit derived from CPPs set up by the assessee with the permission of the RSEB and the GSEB. 2 The deduction from book profit was justified by taking resort to explanation (iv) to Section 115JA of the Act. The relevant portion reads as follows:- ―Section 115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 but before the 1st day of April, 2001 (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. (2) XXXXXXX 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(2), as increased by— (a) XXXXXXX (b) XXXXXXXX (c) XXXXXXXX ITA No. 1187/2005 Page 6 of 26 (d) XXXXXXXX If any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by.— (i) XXXXXXXXXX (ii) XXXXXXXXXX (iii) XXXXXXXXXX (iv)The amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or………..‖ 3 The Assessing Officer after a detailed discussion, vide order dated 24.3.2000 rejected the claim of the assessee and added back the deduction claimed, by the assessee, from book profit, broadly on the following grounds:- (i) the Memorandum and Articles of Association did not permit the assessee to engage in the business of generation of power; (ii) the permission granted by the State Electricity Boards prohibited sale of energy so generated or supply of energy free of cost to others; (iii) the sanction given by RSEB was only for setting up of turbo generator and not for parallel generation and; (iv) lastly, the assessee was in the business of manufacturing fertilizer, for which purpose, it had received a subsidy as the urea manufactured was a controlled and consequently, a licensed item being, subject to the ITA No. 1187/2005 Page 7 of 26 Retention Price Scheme of Government of India which, mandated that since, sale price and the distribution of urea was fully controlled the manufacturer would be allowed a subsidy in a manner which permitted him to earn a return of 12% on his net worth after taking into account the cost of raw material and capital employed, which included both the fixed and variable cost. From this it was concluded that as the assessee had received a subsidy from the Government of India for manufacture of urea and, as was, apparent from the balance sheet and profit and loss account filed by the assessee, the CPPs, were a part of the fertilizer, cement, and caustic soda plants. The CPPs were included in the aforesaid plants and thus, it could not be said that the income derived from the said plants, keeping in view the subsidy received by the assessee under the Retention Price Scheme, was in any way, income derived from generation of power and; (v) lastly, the assessee is not in the business of generation of power and that the assessee is not deriving any income from business of generation of power. A distinction was drawn between an industrial undertaking generating power and one which was in the business of generating power. The assessee‘s case was likened to an undertaking which is generating power but is not in the business of generating power, and hence, not deriving income from generation of power. ITA No. 1187/2005 Page 8 of 26 4. The assessee being aggrieved, preferred an appeal to the Commissioner of Income Tax (Appeals) [hereinafter referred to as ‗CIT(A)‘]. By an order dated 21.1.2001 the CIT(A) allowed the appeal of the assessee with respect to the said issue. After a detailed discussion the CIT(A) summed up his reasons in paragraph 41 of his order. The conclusion arrived at, is as follows:- ―….. (i) the appellant is a company. (ii) The company has generation of power as a main object vide clause (7). (iii) The CPPs are separate licensed industrial undertakings. (iv) Each of the 4 CPPs have separate accounts and administrative structure. The accounts are audited annually and then incorporated in the consolidated accounts of company. The separate audited accounts are filed with the return of income. (v) The desegregation of accounts and profits is sanctified by the Supreme Court decisions in ‗TISCO‘s case 48 ITR 123, The Textile Machinery case 107 ITR 195, Orient Paper case 176 ITR 110, Cellulose Products case 192 ITR 155 which referred to in extension in body of the order. (vi) The decision relied on by the A.O. relate to relief provision contained under chapter VI-A, whereas, the present case pertains to a taxing provision analogous to the TISCO and other Supreme Court cases referred to above. ……..‖ 4.1 As regards computation of profit/loss, in respect of, the CPPs the CIT(A) noted that the issue of quantification had been looked into by the Assessing Officer. In this regard CIT(A) noted the points covered in the assessee‘s letter dated 26.02.2000. A ITA No. 1187/2005 Page 9 of 26 note was also made by the CIT(A) of a letter dated 23.03.2000 issued by the assessee wherein, it had given detailed explanation, in respect of, points raised by the Assessing Officer with regard to the computation of profits of said CPPs. Finally, in paragraph 44 of his order, the CIT(A) categorically returned a finding of fact that the Assessing Officer was wrong in stating that he had not gone into the issue of computation of profits at the time of conducting the assessment proceedings. The CIT(A) noted that the matter was queried and answered. The CIT(A) further noted that since the Assessing Officer in his letter dated 18.02.2000 had specifically stated that he had no opportunity of looking into the computation of profits derived from generation of power his comments were sought vide remand report dated 05.01.2001. The CIT(A) observed that the Assessing Officer in the remand report only offered general comments and said nothing which would indicate as to why that the computation filed by the assessee which was duly authenticated by the auditors ought to be rejected. 4.2 It is in these circumstances, that the CIT(A) came to the conclusion that he was satisfied that the computation certified by the auditors had been made on a proper basis, and that, at any rate allowing any further opportunity to the Assessing Officer would be a travesty of the law of limitation and, more importantly, result in reopening of the assessment by the back door through the mode of re-examination of the computation. ITA No. 1187/2005 Page 10 of 26 5. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal to the Tribunal. The Tribunal sustained the finding returned by the CIT(A) in totality. The Tribunal in brief observed as follows:- (i) that the assessee had, in note No.16 appended to the return, given the details with regard to the CPPs and the basis for arriving at the total profit of Rs 41,88,50,862/-. It further noted that the profit figure was computed on the basis of transfer of power by the CPPs to the urea, caustic soda, cement and PVC plants at market prices, and the rate as charged by State Electricity Board as reduced by 7% due to absence of transmission and distribution losses. Specific expenses relating to the CPPs and a part of common expenses were also deducted by the assessee in computing the profit from business of generation of power aggregating to Rs 41,88,50,862/-, which were, in turn deducted from book profits under Section 115JA of the Act. It further noted that, as indicated by CIT(A), the quantification of profits from generation of power had been made by the assessee on the basis of audited accounts; (ii) contrary to what the Assessing Officer held, one of the objects was, as was, evident upon reading Clause 7 of the Memorandum of Association, to empower the assessee to ―generate, develop and accumulate electrical power and to transmit, distribute and supply such power and to carry on ITA No. 1187/2005 Page 11 of 26 business of a general electric power supply company, ……………… ……..‖. This finding was in line with finding of CIT(A); (iii) that the Assessing Officer had in detail considered the background in which, as also the, the nature of permission granted by the State Electricity Boards to the assessee. The Tribunal noted the fact that the assessee company was duly authorized by the concerned Electricity Board to generate electricity, to that extent, it was engaged in the business of generation of electricity. It further observed that not only was such an activity recognized by the Government, but also, the assessee company was allowed to sell electricity as and when, so required. In view of these facts, the Tribunal concluded that the Assessing Officer was not justified in holding that the profits from power generation used in the manufacturing activities of the assessee were not eligible for deduction. The business of generation of electricity was itself an independent business and therefore the claim of the assessee was fully justified; (iv) that in the event the assessee had not used electricity generated by the CPPs which was transferred to its urea, cement and caustic and PVC plants at a price which was 7% lower than the rates charged by the State Electricity Board, it would have been compelled to buy the same from ITA No. 1187/2005 Page 12 of 26 the State Electricity Boards at higher rates, in which situation, the profit arrived by the CPPs which is, the difference between the sale price charged by the CPPs to assessee‘s company less the cost of generation of electricity, would not have been excluded from the book profit for the purposes of Section 115JA of the Income Tax Act, but extra cost would have been incurred on account of difference between the rates charged by the State Electricity Boards and the rates adopted by the assessee for computation of profits; (v) the business of generation of power by the assessee was carried out through fully independent units which were identifiable industrial undertakings and, therefore, profits earned from these undertakings would qualify for determination of book profits for the purposes of Section 115JA of the Income Tax Act. In this case it was possible to ascertain the profits from generation and supply of power by the CPPs to other units of the assessee and this method has been examined by the auditors. It concurred with the view of the CIT(A) that the term ‗business‘ appearing in Clause (iv) of the explanation to Section 115JA cannot be given the meaning ascribed to it by the Assessing Officer, which is that, the assessee was in the business of deriving income from a fertilizer plant as, the main business of the assessee was to manufacture urea and hence, any income derived from the fertilizer plant was not ITA No. 1187/2005 Page 13 of 26 income derived from business of generation of power. The Tribunal observed in the context of Clause (iv) of the explanation to Section 115JA, that the profit ought to be derived by an industrial undertaking from business of generation and distribution of power. In the case of assessee which had independent CPP it could not be said that it was not carrying on the business of generation and distribution of power. The assessee was, according to the Tribunal, carrying on this business in an organized manner and on a regular basis for which it had a fully set up independent infrastructure and the affairs of such business were independently maintained. In sum and substance, according to the Tribunal, all attributes of business were found present in the case of assessee. It also noted that accounts of such business were prepared and maintained and were also subjected to audit. In view of these findings it held that the CIT(A) was justified in concluding that the assessee was deriving profits from the business of generation of power. Therefore, the amount of such profit was required to be reduced while working out book profits under Section 115JA of the Act . It noted in view of the fact that the Revenue was unable to point out any defect in the method adopted by the assessee in working out the profit, it had no difficulty in upholding the findings of the CIT(A) in totality. ITA No. 1187/2005 Page 14 of 26 6. The Revenue being aggrieved by the impugned judgment of the Tribunal has preferred, as stated above, the present appeal before us. The basic thrust of the Revenue‘s submission before us is that the deduction available under Explanation (iv) to Section 115JA of the Act is available, with respect to, those assessees who are in the business of generation of power or in the business of distribution and generation of power. In other words, no adjustments to book profits is available in respect of CPPs where, the main line of business is different from generation of power or generation and distribution of power. This submission is buttressed with an argument to the effect, that since no person can engage in business with himself, it cannot result in a profit and loss, and hence, there can be consequently no adjustment of books profits as envisaged under Explanation (iv) to Section 115JA of the Act. To support the said submission various factors, as pointed out by the Assessing Officer, have been brought to our notice including the reference to the Memorandum of Association, the letters of sanction issued by RSEB and GSEB, as also, the fact that the price computed by the assessee was a notional amount which resulted in notional profit and not a real profit. It was also submitted that, since no method for computation has been provided either in the Act or in the Rules, therefore the deduction ought not to be made available to the assessee. The judgment of the Supreme Court in the case of Tata Iron & Steel Ltd. v. State of Bihar 48 ITR 123(SC) was sought to be distinguished and reliance was placed on the earlier ITA No. 1187/2005 Page 15 of 26 judgment of Supreme Court in the case of Kikabhai Premchand v. CIT (1953) 24 ITR 506. 6.1 As against this, the learned counsel for the assessee relied upon the orders passed by the CIT(A) and the Tribunal. It was submitted on behalf of the assessee that both the CIT(A) and the Tribunal had returned a finding of fact which ought not to be interfered with except in the event the same was found to be perverse. It was submitted that none of the findings returned by the CIT(A) and the Tribunal have been challenged by the Revenue before this court on the ground of perversity. Heavy reliance has been placed on behalf of assessee on the judgment of the Supreme Court in the case of Tata Iron & Steel Ltd (supra). 7. Having heard the learned counsel for the parties and perused the record placed before us, the issue which requires our determination is whether on a plain reading of the provisions of Explanation (iv) to Section 115JA of the Act, the assessee would be entitled to reduce the book profits to the extent of profit derived from its CPPs, while computing MAT under Section 115JA of the Act. The entire objection of the Revenue to this claim of the assessee is pivoted on the submission that the assessee cannot derive profit from transfer of power from its CPPs to its other units for the following reasons:- ITA No. 1187/2005 Page 16 of 26 (i) firstly, there is no sale, inasmuch as, the transfer of power is not to a third party and consequently, no profits could have been earned by the assessee; (ii) secondly, in any event, the generation of power by CPPs would not constitute business within the meaning of Explanation (iv) to Section 115JA of the Act as the main line of activity of the assessee is not the business of generation of power, an expression which finds mention in Explanation (iv) to Section 115JA of the Act and; (iii) lastly, there is no mechanism for computing the sale price, and consequently, the profit which would be derived on transfer of energy from assessee‘s CPPs to its other units. 8. According to us the fallacy in the argument is self evident, inasmuch as, the counsel for the Revenue has proceeded on the basis that the words and expressions used in Explanation (iv) to Section 115JA are to be confined to a situation which involves a commercial transaction with an outsider. According to us if the words and expression used in the said explanation (iv) are given their plain meaning then the claim of the assessee has to be accepted. 8.1 To answer the first contention as to whether there could be sale of power and resultant derivation of profits in a situation as the present one, one has to look no further than to the judgment of the Supreme Court in Tata Iron & Steel Ltd. (supra). ITA No. 1187/2005 Page 17 of 26 In the said case Tata Iron & Steel Ltd had taken on lease certain iron ore mines. The extracted iron