DCIT, Circle-25(1), New Delhi v. Tata Power Delhi Distribution Ltd
[Citation -2020-LL-0311-22]

Citation 2020-LL-0311-22
Appellant Name DCIT, Circle-25(1), New Delhi
Respondent Name Tata Power Delhi Distribution Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 11/03/2020
Assessment Year 2009-10
Judgment View Judgment
Keyword Tags profit-linked deduction • commercial principle • eligible business • incidental income • business activity • excess amount • surplus fund • derecognition of revenue
Bot Summary: Hon'ble Apex Court held that there are two types profits in such cases i.e. Commercial profits and clear profits governed by two different enactments. Transferrable for the benefit of the consumers do not form part of the assessee's real profit; and for the purpose of calculating the taxable income, such amount have to be deducted from its total income. We are convinced that the ratio of Puna Electricity Supply Co. Ltd is squarely applicable to the case of the assessee before us and on that score, we allow the contention of the assessee that they have rightly reduced the efficiency gain amount their profit and loss account. Some illustrative cases upholding this view are as follows: if an expenditure incurred by assessee for the puupose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. Is not allowed, the same would be added to the profits of the undertaking on which the assessee would d o for deduction under section 80- IB of the Act. In view of the above, the Board has accepted the settled position that the disallowance made under sections 32, 40(a)(ia), 40A(3), 43B, etc of the Act and other specific disallowance, relted to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.


1 IN HIGH COURT OF DELHI AT NEW DELHI Date of Decision:- 11.03.2020 ITA 186/2020 DCIT, CIRDE-25(1), NEW DELHI Appellant Through: Ms. Adeeba Mujahid, Advocate for Mr. Ajit Sharma, Senior Standing Counsel versus TATA POWER DELHI DISTRIBUTION LTD. Respondent Through: Ms. Shashi M. Kapila, Mr. Pravesh Sharma, Mr. R. R. Maurya and Mr. Sushil Kumar, Advocates. CORAM: HON'BLE MR. JUSTICE MANMOHAN HON'BLE MR. JUSTICE SANJEEV NARULA SANJEEV NARULA, J (Oral): 1. present appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred as Act) assails common order dated 14th June, 2019 passed by learned Income Tax Appellate Tax (ITAT), relating to assessment year (AY) 2009-2010, whereby Tribunal has decided several appeals preferred by both Appellant as well as Respondent. present appeal is in respect of ITA No. 5368/Del/2013, filed by Revenue, that stands dismissed by virtue of impugned order. 2. factual matrix giving rise to present appeal is that Respondent-Tata Power Delhi Distribution Ltd. (hereinafter referred as Signature Not Verified Digitally Signed ITA 186/2020 Page 1 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 assessee), joint venture between Tata group and Delhi Government and is in business of distribution of electricity in north and north-west area of Delhi. assessment order was passed under Section 143(3) of Act whereby total income of Respondent was computed at Rs.139,21,95,000/- and additions were made inter alia on ground of (a) derecognition of revenue: Rs.78,91,50,000 and (b) disallowance under Section 80IA of Rs. 35,71,77,686/-. In appeal preferred before Commissioner of Income Tax (hereinafter referred to as CIT(A)), Respondent succeeded and vide order dated 30th July, 2013 above noted additions were deleted. Thereafter, assessee and appellant preferred appeals before ITAT. common issues pertaining to abovenoted additions were identified and decided. issues were decided in favour of Respondent-assessee vide impugned order dated 14th June, 2019. Appellant/ Revenue has preferred present appeal impugning order passed by Tribunal qua aforenoted issues. 3. Ms. Adeeba Mujahid, learned standing counsel for Revenue argues that order passed by Tribunal is not in accordance with law and additions made on account of derecognition of revenue is justified. She argues that since Respondent-company has not given any refund to customers, surplus fund which continues to be at disposal of Respondent has to be recognised as income. With respect to disallowance relating to deduction made under Section 80 IA of Act, she argues that this incidental income arising out of business of respondent undertaking is not directly related to business and is therefore not eligible for deduction under aforenoted provision of Act. She Signature Not Verified Digitally Signed ITA 186/2020 Page 2 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 further argues that since assessee has included income arising on account of commission on arrears, replacement of burnt metres, inspection fee, reconnection fee, miscellaneous recovery from suppliers etc, which are incidental incomes and therefore, cannot be claimed as income derived form eligible business so as to be entitled to deduction under Section 80 IA of Act. She also submits that this Court in Principal of Commissioner of Income Tax vs. M/s Tata Power Delhi Distribution Ltd., ITA No. 687/2019 has issued notice on appeal preferred by appellant and prays that this appeal be also admitted. 4. We have given thoughtful consideration to submissions advanced by learned counsel for Revenue. questions of law that have been urged for our consideration as also gounds of challenge made out in memorandum of appeal are relating only to (i) additions made on account of derecognised revenue and (ii) for deleting disallowance deduction made under Section 80 IA of Act. No other ground has been urged and we have therefore proceeded to consider merits of submissions with respect to aforenoted issues only. first addition relating to recognition of revenue is on account of efficiency gain. learned Tribunal after considering facts of case have applied ratio of decision of Supreme Court in Poona Electric Supply Company Limited vs. CIT (1965) 57 ITR 521, wherein Apex Court has deliberated upon concept of commercial profits viz-a-viz clear profits. On basis of this principle, Court has held that amount transferable for benefit of consumers do not form part of assesee s real profit and for purpose of calculating taxable income, such amount has to be deducted Signature Not Verified Digitally Signed ITA 186/2020 Page 3 of 12 By:SAPNA SETHI Signing Date:17.03.2020 11:57:08 from its total income. On strength of this reasoning, Tribunal has relied upon decision of Coordinate Bench in Assessment Year 2006- 07 and held that since Respondent-assessee has no right to appropriate efficiency gain amount and that such amount is at disposal of DERC, amount has to be reduced from profits and loss account. observations of Tribunal on this aspect are as under: 15. We find that similar facts were considered by co- ordinate bench in assessment year 2006-07 in ITA N.o. 4848/DEL/2010 and 5026/DEL/2010. relevant findings of co-ordinate bench read as under: "17. It is, therefore, clear from arguments advanced before us that question involved in this matter is whether disputed Rs.91.13 crores could be brought to tax by treating it as application of income after its accrual. This aspect requires reading of provisions of Delhi Electricity Reforms Act, 2000 with notifications issued and orders passed by DERC. As could be seen from Delhi Electricity Reforms Act, 2000, it received assent of President of India on 6.3.2001 and promulgated by way of Notification dated 8.3.2001. Section 2(c) of Act defines commission to mean Delhi Electricity Regulatory Commission. Act constitutes Commission. It empowers Government to issue directions to Commission in matter of policy involving public interest from time of time regulating discharge of commission functions. In turn, by virtue of Section 28 of Act, holder of license (i.e. assessee) is under obligation to observe methodologies and procedure specified by Commission from time to time in calculating expected revenue from charges which it is permitted to recover pursuant to terms of its license and in designing tariffs to collect those revenues. Commission is also empowered to prescribe terms and conditions for Signature Not Verified Digitally Signed ITA 186/2020 Page 4 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 determination of licensee's revenues and tariffs by regulations duly published in official Gazette and in such other manner as Commission considers appropriate. In this respect, it is provided that Commission shall be guided by following parameters, namely:- financial principles and their application provided in Sixth Schedule to Act, 1948 read with sections 57 and 57 of said Act; factors which would encourage efficiency, economic use of resources, good performance, optimum investments and other matters which Commission considers appropriate keeping in view salient objects and purposes of provisions of this Act; and interest of consumers. 18. In exercise of powers conferred by Section 12 and other applicable provisions of Act, GNCTD issued Notification No. F.11(119/(8)/2001- Power in month of November 2001. In this Notification vide paragraph 8, Government considered necessity of effective re- organization of DVB and sale of 51% equity shares in distribution companies. assessee is one of entities, who participated in bid, became successful for lowest annual target loss was awarded 51% of equity. Vide para 12, this Notification prescribes that in years between 2002-03 and 2006-07 in event of actual AT &C loss of distribution licensee for any particular year is better i.e. lower than level proposed in bid, distribution licensee shall be allowed to retain 50% of additional revenue resulting from such better performance and balance 50% of additional revenue from such better performance shall be counted for purpose of tariff fixation. Para 13 of such Notification provides that all expenses that shall be permitted by Commission, tariffs shall be determined in such way that distribution licensees earn, at least, 16% return on issued and paid up capital and free reserves (excluding consumer contribution and Signature Not Verified Digitally Signed ITA 186/2020 Page 5 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 revaluation reserves but including share premium and retained profits outstanding at end of any particular year) provided that such share capital and free reserves have been invested into fixed or any other assets etc. 19. Para 16 of this Notification sums up mandate in this Notification in following terms: (a) AT&C loss programme is to be as per bid submitted by purchaser (selected bidder) as per para 11 above. (b) Distributin licensees shall be entitled to retain 50% of additional revenues from any AT&C loss reduction over and above then level proposed in bid by Purchaser (selected bidder) and this shall not be counted as revenue for purpose of tariff fixation for succeeding years. balance 50% of excess efficiency gain shall be counted as revenue for purpose of tariff fixation. (c) Distribution licensees earn, at least, 16% return on issued and paid up capital and free reserves (d) amount agreed to be made available by Government to TRANSCO will be as loan for particular year. 20. In deference to this Notification, DERC in its order passed in July 2005 at paragraph 4.2 observed that for Asstt. Year 2004-05, assessee had achieved AT&C loss level lower than minimum bid level specified by GNCTD, accordingly provisions of policy directjgns and GNCTD s clarification have been applied to determine extent of additional revenue to be retained by DISCOM and that it will be passed down to consumers while determining annual revenue requirement utilities. It is further observed that in case of assessee as over achievement in AT&C loss reduction is more than minimum level target entire additional revenue as result of AT and C loss reduction up to minimum level with respect to bid level, and 50% of additional revenue beyond minimum level has been considered as additional revenue for Signature Not Verified Digitally Signed ITA 186/2020 Page 6 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 purpose of ARR determination and balance 50% of savings beyond minimum level has been approved to be retained by assessee. 21. Basing on this, we are convinced that assessee is under statutory obligation to meet targets of reduction of A&TC losses and when AT &C loss level reached by assessee in that particular year is better i.e. lower than level prescribed in bid, assessee shall be entitled to 50% of additional revenue resulting from such purpose. This 50% becomes regular taxable income of assessee and insofar as this income is concerned, for this Asstt. Year 2006-07 also, there is no dispute. balance 50% of this additional revenue, which is mandatory to be counted for purpose of tariff fixation, which is called as efficiency gain' will be taken into consideration by DERC while permitting tariff of future years to be determined so as to see that assessee would earn at least 16% return on issued and paid up capital and free reserves. Notification issued in November 2001, referred to above, is clear in its mandate that this 50% efficiency gain shall be reckoned as revenue for the. purpose of tariff fixation and assessee is under obligation to follow mechanism of fixation of tariff by DERC. 22. In Puna Electricity Supply Company Ltd. vs. CIT (1965) 56 ITR 521 (SC), Hon ble Apex Court considered similar situation where licensee like assessee was obligation to set apart some amount and transfer it to consumer benefit reserve account which represents rebate to customers of excess amount collected from them. Hon'ble Apex Court held that there are two types profits in such cases i.e. Commercial profits and clear profits governed by two different enactments. Commercial profits are arrived at on commercial principle whereas other is regulated by statute. clear profits could be determined only after excluding amount statutorily transferred to represent rebate to customers of excess amount collected from Signature Not Verified Digitally Signed ITA 186/2020 Page 7 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 them. Finally Hon' ble Apex Court held that amount. transferrable for benefit of consumers do not form part of assessee's real profit; and for purpose of calculating taxable income, such amount have to be deducted from its total income. 23. Record speaks that this decision was brought to notice of learned CIT(A) but he distinguished same stating that in such case assessee was crediting excess amount in separate account called Consumer Benefit Reserve Account" and they were part of excess amount paid to it and reserve to be returned to consumers; whereas in case of assessee, assessee is not required to return excess amount to consumers and on contrary, assessee is beneficial owner of amount which it could use way it likes. On this premise, learned CIT(A) held that decision in case of Puna Electricity Supply Co. Ltd (supra) has no application to facts of present case. 24 . On careful consideration factual matrix involved in both cases and reasoning of Hon ble Apex Court in reaching conclusion, we are of considered opinion that approach of learned CIT(A) is incorrect. In preceding paragraphs, we have noted that assessee is under statutory obligation to set apart 50% of excess amount generated due to overreaching of targets, for purpose of consideration of DERC to fix future tariffs either to give relief to consumers or otherwise. reading of statute, notification and orders of DERC clearly indicates that assessee is not free to use this efficiency gain amount way it likes. Whether or not separate account is opened, when this amount is separately shown under this head in books, it makes little difference in so far as application of ratio of Puna Electricity Supply Co. Ltd. (supra) is concerned. Crux of matter is that assessee in both cases has no right to appropriate 'efficiency gain' amount and such amount is at disposal of DERC though Signature Not Verified Digitally Signed ITA 186/2020 Page 8 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 not physically but in respect of utilization thereof. We, therefore, are convinced that ratio of Puna Electricity Supply Co. Ltd (supra) is squarely applicable to case of assessee before us and on that score, we allow contention of assessee that they have rightly reduced efficiency gain amount their profit and loss account. 5. We feel that in view of factual situation discussed above, approach adopted by Tribunal in applying ratio of decision of Supreme Court in Poona Electric Supply Company Limited vs. CIT (supra) is wholly justified and does not call for any interference. Accordingly ground of challenge urged by revenue on this aspect is rejected. 6. With respect to deductions under Section 80IA of Act, Tribunal has referred to circular no. 37/2016 dated 2 nd November, 2016 issuesd by Central Board of Direct Taxes (hereinafter referrerd to as CBDT). On basis of said circular, Tribunal has observed that issue has become redundant and academic in nature. relevant portion of impugned order is extracted herein below: 22. In our considered opinion, issue is now well settled by Circular No. 37/2016 dated 02.11.2016 issued by Central Board of Direct Taxes, which reads as under: Chapter VI-A of Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. In computing profits and gains of business activity, Assessing Officer may make certain disallowances, such: as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc , of. Act. At times disallowance out of specific Signature Not Verified Digitally Signed ITA 186/2020 Page 9 of 12 By:SAPNA SETHI Signing Date:17.03.2020 11:57:08 'expenditure claimed may also be made. effect of such disallowances is increase in profits. Doubts have been raised as to whether such higher profits would also result in claim for higher profit-linked deduction under Chapter VI-A. 2. issue of claim of higher deduction on enhanced profits has been contentious one. However, . courts have generally held that if expenditure disallowed is related to business activity against which Chapter VI-A deduction has been claimed, deduction needs to be allowed on enhanced profits. Some illustrative cases upholding this view are as follows: (i) if expenditure incurred by assessee for puupose of developing housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of Act would qualify for deduction under section 80-IB of Act. This view was taken by courts in following cases: Income-tax Officer - Ward 5(1) vs. Keval Construction, Tax Appeal No. 443 of 2012, December 10, 2012, Gujarat High Court. Commissioner of Income-tax-IV, Nagpur vs; Sunil Vishwambharnath Tiwari, IT Appeal No. 2 of 2011, September 11, 2015, Bombay High Court. (ii) deduction under section 40A(3) of Act. is not allowed, same would be added to profits of undertaking on which assessee would d o for deduction under section 80- IB of Act. This view was taken by the. court in following cases: "Principal CIT. Kanpur vs. S onya Merchants Ltd. I.T. Appeal No. 248 of 2015, May 03, 2016 Allahabad High Signature Not Verified Digitally Signed ITA 186/2020 Page 10 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 Court above views have attained finality as these judgments of High Courts of Bombay, Gujarat and Allahabad have been accepted by Department. 3. In view of above, Board has accepted settled position that disallowance made under sections 32, 40(a)(ia), 40A(3), 43B, etc of Act and other specific disallowance, relted to business activity against which Chapter VI-A deduction has been claimed, result in enhancement of profits of eligible business, and that deduction under Chapter VI-A is admissible on profits so enhanced by disallowance. 4. Accordingly, henceforth, appeals may not be filed on this ground by officers of Department and appeals already filed in Courts/ Tribunals may be withdrawn/ not pressed upon. above may be brought to notice of all concerned." 23. In view of above Circular, disallowances made by Assessing. Officer are related to business activity against which deduction u/s 80IA of Act has been claimed which resulted in enhancement of profits of eligible business and hence deduction under Chapter VIA is admissible on profit so enhanced by disallowances. 24. In light of above. CBDT Circular, all issues become academic in nature and therefore, need no separate adjudication, though it would be pertinent to mention chere that all disputed issues remain open for both parties in case deduction u/s 80IA is denied by Hon ble Superior Court. In light of above discussion and finding, all appeals of assessee are allowed whereas those of revenue are dismissed. 7. We do not find any perversity in view taken by Tribunal. circular of CBDT has been issued in view of decisions of various High Signature Not Verified Digitally Signed ITA 186/2020 Page 11 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 Courts that find mention therein. issue is no longer res integra. Board has accepted settled position that disallowances made under Section 32, 40(a)(ia), 40A(3), 43B, etc. of Act and other specific disallowances, related to business activity against which Chapter VI-A deduction has been claimed, result in enhancement of profits of eligible business, and that deduction under Chapter VI-A is admissible on profits so enhanced by disallowance. 8. For foregoing reasons, we find no question of law much less substantial question of law arises for our consideration. 9. Accordingly, appeal is dismissed. SANJEEV NARULA, J MANMOHAN, J MARCH 11, 2020 v Signature Not Verified Digitally Signed ITA 186/2020 Page 12 of 12 By: SAPNA SETHI Signing Date:17.03.2020 11:57:08 DCIT, Circle-25(1), New Delhi v. Tata Power Delhi Distribution Ltd
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