Commissioner of Income Tax vs Reliance Energy Ltd.

M.S. Sanklecha, J.—This appeal by the Revenue under s. 260A of the IT Act 1961 (the Act) challenges the order dt. 14th May, 2010 of the Tribunal relating to the asst, yr. 2003-04. The order dt. 14th May, 2010 of the Tribunal disposes of two appeals of the Revenue for asst. yrs. 2001-02 and 2003-04. The issue arising in both the assessment years is with regard to reopening of assessment under ss. 147 and 148 of the Act. However the two appeals with regard to asst. yr. 2001-02 (being appeal No. 6791 of 2010) and the present appeal are being disposed of by separate orders as appeal No. 6791 of 2010 with regard to asst. yr. 2001-02 deals with reopening of assessment beyond a period of 4 years from the end of the relevant assessment year. While this appeal is with regard to reopening of assessment within a period of 4 years from the end of the relevant assessment year.

The Revenue has formulated the following questions of law for the consideration of this Court:

(a) Whether on the facts and circumstances of the case and in law, the Tribunal was correct in upholding the order of the CIT(A) in cancelling the notice under s. 148 and the assessment under s. 147 holding that the reassessment proceedings initiated based merely on change of opinion without taking into consideration that Expln. 1 to s. 147 of the Act squarely applied to this case?

(b) Whether on the facts and circumstances of the case and in law, the Tribunal was correct in upholding the order of the CIT(A) when the assessee did not bring to the notice of the AO, the Maharashtra Electricity Regulatory Commission (MERC) Circular which prescribed the ''reasonable rate of return'' earned, by the assessee on the basis of which tariff of electricity was to be calculated and on the basis of which the AO has now reworked out the eligible profit for deduction ?

(c) Whether on the facts and circumstances of the case and in law, the Tribunal was correct in upholding the order of the CIT(A) in deciding that the assessment was reopened on change of mind as the issues decided in the original assessment and reopened assessment viz. pricing of power and quantum of profits eligible for deduction, were different and thus it cannot be said that a change of opinion had taken place in the case ?

The respondent-assessee is engaged in the business of generation and distribution of electricity. Originally the respondent was engaged only in the distribution of electricity in Mumbai. However, w.e.f. asst. yr. 1996-97 it commenced generation of electricity from its plant at Dahanu. As a consequence of establishment of plant for generation of electricity the respondent became entitled to deduction under s. 80-IA of the Act.

For the asst. yr. 2003-04, the respondent had filed its return of income which was assessed on 24th May, 2005 under s. 143(3) of the Act. The AO by order dt. 24th May, 2005 determined the respondent''s income under the normal provision at Rs. 34.91 crores and under s. 115JB of the Act at Rs. 215 crores. The aforesaid income was determined after allowing a deduction of Rs. 282 crores in respect of the activity of power generation at Dahanu.

On 31st March, 2008, a notice was issued by the appellant under s. 148 of the Act to the respondent seeking to reopen the assessment for the asst. yr. 2003-04. The reasons for the reopening the assessment are recorded as under:

In this case, the assessee has filed the return of income for asst. yr. 2003-04. on 28th Nov., 2003 declaring total income at nil and taxable income under s. 115JB at Rs. 14,24,89,782. The assessment order under s. 143(3) of the Act has been passed on 24th May, 2005 assessing the total income under normal provisions of the Act at Rs. 34,91,44,430 and under s. 115JB of the Act at Rs. 2,15,78,29,379. In the same assessment order, the assessee has been allowed the deduction under s. 80-IA of the Act at Rs. 38,67,924 (in respect of profit from Elastimold business) and also at Rs. 2,82,75,81,809 in respect of profit from generation activity.

Sec. 80-IA(10) of the IT Act, 1961 provides that where it appears to the AO that owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason the course of business between them is so arranged that the business transacted between them produced to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the AO shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.

Tariff for purchase of sale of power is determined on the basis of the normative parameters determined by the Government of India under its Notification No. SO-251(E) dt. 30th March, 1992 issued under the provisions of Electricity Act, 1948. Tariff situates, both for the Central Sector and Independent. Power Producers (IPPS) were determined on cost plus profit basis. Profit was determined on the ''return on equity'' basis which was to be computed on the paid up and subscribed capital relatable to the generating unit @ 16 per cent of such capital. In this case, the assessee has claimed the deduction under s. 80-IA of the Act in respect of generation of power from its power unit located at Dahanu. While filing the return of income for asst. yr. 2001-02, the assessee was aware that the profit should not exceed the 16 per cent of its capital during the PY in view of the principles which arc the basis for the fixation of tariff. However, the assessee has claimed the deduction under s. 80-IA of the Act on the profits of Dahanu Unit which exceeded 16 per cent of its capital. Though the MERC order in Case No. 18 of 2003 was not passed till the date of passing; of the order under s. 143(3) of the Act in the assessee''s case, however, since the assessee was aware of the tariff regulation of restricting its profits to 16 per cent in view of the act (supra) the claim of deduction under s. 80-IA should have been accordingly restricted in the return of income filed by the assessee and this fact should also have brought to the notice of the AO during the course of assessment proceedings. Thus, I am of the view that the claim of excess deduction under s. 80-IA of the Act is because of failure on the part of the assessee, by not disclosing these facts truly and fully.

Maharashtra Electricity Regulatory Commission (MERC) in its order in the Case No. 18 of 2003 calculated "clear profit or reasonable rate of return" on the assessee''s capital for both generation and distribution of power. On perusal of assessee''s records for asst. yr. 2001-02, it is observed that incorrect computation of profits without taking into consideration the tariff regulation which provides for clear profit and reasonable rate of return on capital base method has resulted in escapement of income to the extent of Rs. 177.08 crores, which is worked out as under:

Therefore, I have reason to believe that in the case of the assessee, the income of the assessee chargeable to tax to the extent of Rs. 111.80 crores has escaped the assessment for asst. yr. 2001-02 (sic. 2003-04). This escapement of income is by reason for the failure on the part of the assessee to disclose fully and truly all material fact necessary for the assessment for the asst. yr. 2001-02 (sic. 2003-04).

Issue notice under s. 148 of the Act.

The respondent resisted the reopening of the assessment. However, the AO by an order dt. 31st Dec., 2008 besides holding that an amount of Rs. 111.80 crores had escaped assessment in view of excess deduction claimed under s. 80-IA of the Act in the regular proceeding also held that the reopening of assessment was justified as:

(a) the reopening was for a period of less then 4 years from the end of the relevant assessment year the only requirement was that the AO must have a reasonable belief that income has escaped assessment. This belief was formed on the basis of the order of the MERC for financial year 2004-05 determining the tariff for the sale of power by an order dt. 1st July, 2004 in which the profits attributable to its business of generation of electricity was pegged at 16 per cent return on investment;

(b) Consequently, it was held that a deduction higher than 16 per cent rate of return on investment was claimed as profits for deduction under s. 80-IA of the Act in respect of its electricity generation business; and

(c) the profits for purposes of deduction under s. 80-IA of the Act of the power generation business has to be computed on the basis of reasonable profits in terms of s. 80-IA(10) of the Act and not under s. 80-IA(8) of the Act as done in the regular assessment i.e. the market value of goods and services (electricity supplied) from respondent''s electricity generating business to its distribution business;

In first appeal, the CIT(A) by an order dt. 2nd June, 2009 allowed the respondent''s appeal for asst. yr. 2003-04 by following his order in respondent''s appeal for asst. yr. 2001-02. So far as reopening of assessment for the asst. yr. 2003-04 was concerned the CIT(A) held that the same was not sustainable as the AO had no reason to believe that income had escaped assessment. This was on account of the fact that the Revenue had opened the assessment only for the purposes of application of s. 80-IA(10) of the Act when the same was available during the regular proceedings. Therefore, the issue of the claim for deduction under s. 80-IA(8) or (10) of the Act was an issue of interpretation and therefore it was a mere change of opinion not warranting reopening of the assessment. On other issues it follows his order dt. 2nd June, 2009 of the CIT(A) for the asst. yr. 2001-02. In view of the above, the CIT(A) held that the order dt. 31st Dec., 2008 of the AO cannot be sustained.

Being aggrieved, the appellant herein preferred an appeal to the Tribunal. The Tribunal by its order dt. 14th May, 2010 upheld the order of the CIT(A) dt. 2nd June, 2009 and held that the order dt. 31st Dec., 2008 of the AO is not justified on account of the following:

(a) Sec 80-IA(10) of the Act can have no application to the present facts as that sub-section postulates that there has to be a close connection between assessee and some other persons. In this case, there is no other person involved. The respondent is engaged in both power generating business as well as power distribution business and there is no transaction with any other person in respect thereto. Therefore, the original order of the assessment dt. 23rd March, 2004 correctly applied s. 80-IA(8) of the Act which applies to transaction carried out by an assessee between its eligible business and its non-eligible business so as to determine: the market value of goods and services in arriving at its profit. In any event this was also a mere change of opinion not warranting reopening of assessment under s. 147 and 148 of the Act.

(b) the MERC order dt. 1st July, 2004 was in respect of fixing the tariff at which power has to be supplied and the same would be of no relevance in arriving at the profit at the generating plant of the respondent at Dahanu for the purposes of s. 80-IA of the Act;

(c) the assessment order dt. 24th May, 2005 passed in regular assessment dealt with the quantification of deduction under s. 80-IA in respect of Dahanu plant and had merged into the order of appellate authorities, namely, the CIT(A) and the Tribunal. This is so as the appellate authorities had dealt with the determination of profit for the purpose of deduction under s. 80-IA of Dahanu generation plant. Consequently, the AO now has no jurisdiction to reopen the assessment under ss. 147 and 148 of the Act as provided in view of the third proviso to s. 147 of the Act.

We have heard Mr. Pinto, advocate for the Revenue and Mr. Pardiwalla, senior advocate for the respondent. We find that both the CIT(A) as well as the Tribunal have arrived at a finding of fact that AO did not have any reasonable belief to come to the conclusion that that there has been any escapement for the asst. yr. 2003-04. The order of MERC dt. 1st July, 2004 specifically deals with regard to fixing of the tariff rate at which power has to be supplied to the consumer. It is in the process of fixing of tariff rate for the consumer that 16 per cent return on capital investments is to be taken into account as one of the ingredients to arrive at the tariff rate and has nothing to do with the actual profits which are earned by an activity of the power generation plant. As against that the deduction allowed under s. 80-IA of the Act is on the actual profit earned by the power generation plant and has nothing to do with the fixing of the tariff rate for the supply of power to the consumer. Moreover the Tribunal has also correctly held that the jurisdiction to issue a reopening notice for the asst. yr. 2003-04 is absent in view of the fact that the profits earned as determined under s. 80-IA of the Act with regard to its Dahanu generation plant was the subject-matter of appeal before the CIT(A) and the Tribunal. Consequently, the original order of assessment dt. 24th May, 2005 had merged into the order of appellate authority inter alia with regard to the profits earned from the power generation plant at Dahanu for the purposes of deduction claimed under s. 80-IA of the Act. The jurisdiction to exercise powers of reopening an assessment is specifically barred in respect of any matter which has been a subject-matter of the appeal by the third proviso to s. 147 of the Act. Further the issue of application of s. 80-IA(10) of the Act instead of s. 80-IA(8) of the Act to arrive at the profit for claiming deduction under s. 80-IA of the Act is a mere change of opinion which would not warrant reopening of assessment. The material to reopen the assessment being relied on by the Revenue seems to be the order of MERC dt. 1st July, 2004 which has nothing to with arriving at profits for purposes of deduction under s. 80-IA of the Act but deals with fixing of the power tariff for the consumer and for that purpose takes as one of the ingredients 16 per cent return on investments. Therefore, no fault can be found with the order of the Tribunal dt. 14th May, 2010. In view of the above, the questions of law as formulated do not raise any substantial question of law. Therefore, the appeal is dismissed with no order as to costs.