Case Law Details

Case Name : N.T.P.C. Limited Vs. Deputy Commissioner of I.T. (ITAT Delhi)
Appeal Number : ITA No. 1438/Del/2009
Date of Judgement/Order : 30/04/2012
Related Assessment Year : 2005-06
Courts : All ITAT (4340) ITAT Delhi (959)

The expression “article, thing or goods” are not defined in the Income-tax Act, 1961. Learned Commissioner while treating the electricity as not an article or thing has not made reference to any provisions of the Income-tax Act, 1961, he simply construed the meaning of electricity as not article or thing on the basis of his own inference drawn from the nature of  this item but if we evaluate the conclusion drawn by the Learned Commissioner in the light of the decision of the Hon’ble Supreme Court given in the case of Indian Cine Agency, CST Vs. M.P. Electricity Board and State of Madhya Pradesh Vs. NTPC then it would suggest that electric energy has all trapping of an article or goods.

The process of its generation is also akin to manufacture or production of an article or thing. It is being generated in huge plants though scientifically one may say it is transformation of one source of energy into the other. But all these aspects have been considered in these three judgments of the Hon’ble Supreme Court wherein Hon’ble Court has explained what is manufacture or production and what is electricity. Learned DR at the time of hearing, had made reference to the order of the ITAT, Chennai and the judgment of the Hon’ble Supreme Court in the case of NC Budhiraja. As far as the judgment of the Hon’ble Supreme Court in the case of N.C. Budhiraja is concerned that has been considered by the Hon’ble Supreme Court itself in the case of Indian Cine Agency (supra). The ITAT in the case of Tamilnadu Chlorates has considered the admissibility of deduction under section 80-HH and in that test held that electricity is not an article. The ITAT has not dealt with these two judgments extensively rather simply observed that decision in the case of Madhya Pradesh Electricity Board was given in the context of the  language of a particular statute. The only discussion made by the ITAT with regard to these two judgments of the Hon’ble Supreme Court reads as under:

“6. Reference was made to the decisions of Apex Court rendered in the case of M.P. Electricity Board 35 STC 188 (sic). In this case it was held that electricity is goods within the meaning of section 2(3) of Central Province and Virar Sales-tax Act. This decision was rendered in the context of the language of a particular statute. As such this meaning cannot be extended to the facts of the present case”.

Thus, taking into consideration all these aspects, we are of the view that admissibility of additional depreciation cannot be denied to the assessee merely on the ground that electricity is not an article or thing. The order of the Learned CIT(Appeals) is reversed to this extent and the disallowance is deleted.

INCOME TAX APPELLATE TRIBUNAL, DELHI

ITA No. 1438/Del/2009 – Assessment Year: 2005-06

N.T.P.C. Limited Vs. Deputy Commissioner of I.T.

Date of pronouncement : 30.04.2012

ORDER

The present appeal is directed at the instance of assessee against the order of Learned CIT(Appeals) dated 20.02.2009 passed under section 263 of the Income-tax Act, 1961 in assessment year 2005-06. The assessee has taken five grounds of appeal and ground Nos. 2, 3 and 4 have further sub-grounds of appeal. Thus, they are not strictly in consonance with Rule 8 of the ITAT Rules, they are descriptive and argumentative in nature. In brief, the grievance of assessee is that Learned CIT(Appeals) has erred in taking cognizance under sec. 263 of the Act and thereby modifying the assessment order by withdrawing the additional depreciation amounting to  Rs.187,55,77,000 and directing the Assessing Officer to examine the allowance of Rs.938.80 crores on account of revision of sales afresh.

2. The brief facts of the case are that assessee has filed its return of income under sec. 139(1) of the Income-tax Act, 1961 on 24.10.2005 declaring total income of Rs.1330,17,92,000. This return was processed under sec. 143(1) of the Act on 27.2.2006 at the returned income. Subsequently, the case of the assessee was selected for scrutiny assessment and a notice under sec. 143(2) of the Act was issued on 23.3.2006 which was duly served upon the assessee. Learned Assessing Officer had served a detailed questionnaire upon the assessee under sec. 142(1) of the Act. In response to the notices, Shri PK Gupta, DGM(Finance & taxation) attended the assessment proceedings and submitted the necessary details from time to time, as called for by the Assessing Officer. On an analysis of various issues, learned Assessing Officer has passed the assessment order under sec. 143(3) on 27.11.2006. Learned Assessing Officer has determined the taxable income of the assessee at Rs.3736,18,91,370.

3. On an analysis of the assessment record, Learned Commissioner harbored an opinion that Assessing Officer has allowed additional depreciation under sec. 32(1)(iia) of the Act amounting to Rs. 187,55,71,000  on account of additional assets at Rama Gundam and Talcher Super Power Plants, prima facie, is not admissible to the assessee. Assessing Officer has not deliberated upon on this issue and, therefore, his order is erroneous as well as prejudicial to the interest of the revenue. Learned Commissioner further observed that the assessee company had raised the total sale bills to the customers of Rs.23066.03 crores as per the earlier norms of Central Electricity Regulatory Commission (CERC), final order of CERC was not passed during the year and the same was to be passed in succeeding year. The assessee company has provisionally revised the sales downward as on 31.3.2005, it reduced the sales provisionally to Rs.22128 crores on estimate basis that too without issuing any corresponding credit note to the customers. In the opinion of the Learned CIT(Appeals), learned Assessing Officer has allowed the assessee to reduce sales by a sum of Rs.938.03 crores without examining the issue, hence his order is erroneous and prejudicial to the interest of the revenue. He issued a detailed show-cause notice under section 263 of the Income-tax Act, 1961 on 19.10.2007 inviting the explanation of the assessee as to why the assessment order be not treated as erroneous and prejudicial to the interest of the revenue. The copy of the show-cause notice is available on page 70 of Volume I of the  paper book. Learned Commissioner has also extracted the notice in the impugned order and it reads under:

“2. Accordingly, a notice dated 19.10.2007 u/s. 263 as follows was issued to the assessee.

(a) “Additional Depreciation:

During the year under consideration assessee company claimed additional depreciation of Rs. 187,55,71,000 on account of addition of assets at Ramagundam and Talcher Super Power Plants u/s. 32(1)(iia) of the Income-tax Act. This was the first year in which such claim was made:

Section 32(iia) of the Income-tax Act reads as under:

In the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture of production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).

From plain reading of the Section 32(iia) of the Act, it is evident that benefit is available only to those undertakings which are engaged in the business of manufacture or production of any article or thing. Other businesses are not eligible to claim the benefit. Generation of power cannot be equated with the production of article or thing. Article or thing in common parlance is known as something tangible, movable, etc.

Generation of power is giving energy as output and therefore, activity is no way similar to the production of article or thing. In case of CIT vs. N.C. Budhiraja and Co. (1993), 204 ITR 412 (S.C), it was held that the expression ‘manufacture’ and ‘produce’ are normally associated with movables-articles and goods, big and small. Therefore, in light of the position of facts and law claim of additional depreciation has been erroneously allowed and to that extent order of the A.O. is erroneous is so far as it is prejudicial to the interest of revenue.

(b) Provisional Revision of Sales

In Schedule 28 of Annual Report of the company vide para 3(a) and (b) it is mentioned:

3(a)

‘The Central Electricity Regulatory Commission (CERC) has notified by regulation in March 2004, the terms and conditions for determination of tariff applicable with effect from Ist April, 2004 for a period of five years. Pending final determination of tariff for the period Ist April 2004 onwards, CERC has directed by notification that on provisional basis, the annual fixed charges as applicable on 31st March, 2004 shall be billed at target availability and variable charges based on norms of operation notified in Regulation, 2004. The amount billed for the year on this basis is Rs.230,663 Million. Since the amount billed is subject to adjustment with effect from Ist April, 2004, pending final determination of the tariff by CERC, sales amounting to Rs.221,280 million for the year have been provisionally recognized on the basis of principles enunciated by the CERC in Regulation, 2004.

3(b)

further, in case of stations for which final tariff orders have been issued by the CERC for the period up to 3 1.3.2004, sales amounting to Rs.2768 million has been accounted for during the year. In the previous year there was a reduction effected in sales to the extent of Rs.9034 million relating to earlier years”.

In this matter assessee company has provisionally revised the sales downward as on 3 1.3.2005. Assessee company had raised the total sale bills of the customers of Rs.23066.3 crores as per earlier norms of CERC. Final order of CERC was not passed during the year and same was to be passed in some succeeding years. There was no occasion to reduce the sales provisionally to Rs.22 128 crores on estimated basis and that too without issuing any corresponding credit note to the customers. The determination of liability as on 31.3.2005 is contingent upon the final order by the CERC. Therefore, the reduction in sale in this manner is against the law. Moreover, assessee company is again passing a final entry on receipt of CERC order as mentioned in para 3(b) of the Schedule 28. Assessee company cannot make any provision on estimated basis when final determination is a future event. In this manner, company has wrongly reduced sale by Rs.938.3 crores. Assessing Officer has failed to examine the issue. Therefore, in light of the  position of facts and law provisionally entry reducing the sale has been erroneously allowed and to that extent order of the A.O. is erroneous in so far as it is prejudicial to the interest of revenue.

You are requested to show cause as to why the order passed u/s. 143(3) be not revised on the issue of wrong allowance of additional depreciation and provisional revision of sales of energy. Your reply must reach to the office of the undersigned on or before 26.10.2007. You may attend the office of undersigned on 26.10.2007 at 11.00 a.m,”

4. Learned Commissioner after hearing the assessee and going through the record observed that assessee is engaged in the activity of generation of power. Section 32(1)(iia) of the Act provides an additional depreciation to those undertakings which are engaged in the business of manufacture or production of any article or thing. According to the Learned Commissioner, other businesses are not eligible to claim the benefit. He is of the opinion that generation of power cannot be equated with the production of article or thing because article or thing in common parlance is known as something tangible and moveable etc. Generation of power is giving energy as out put and, therefore, activity is no way similar to the production of article or thing. According to the Learned Commissioner, an article or thing is always  associated with the concept of weight, mass and volume. Power or Electricity does not have any of these attributes. It has no volume, it does not occupy any space, no weight or no mass can be attributed to it. In the history of income-tax legalization, a distinction between the manufacturing undertaking and undertaking in generation of power has been maintained throughout. Learned Commissioner observed that if one looks through the various deductions/exemptions granted to the power sector in the history of income-tax legislation then he would come to know that this activity has always been treated differently from the other activities, like manufacturer production of article, construction and mining etc. Wherever a deduction has been granted for power generation undertaking separate mechanism has been provided. Referring to section 32(1)(vi) as stood prior to 01.04.1998, Learned Commissioner has observed that additional depreciation was provided by virtue of this section but categorically specifies both the businesses i.e. generation of power and manufacture of production or an article or thing. In this way, Learned Commissioner has held that additional depreciation is not admissible to the assessee. Learned Assessing Officer without conducting proper inquiry has granted the additional depreciation to the assessee. He set aside the assessment order and directed the Assessing Officer to withdraw the additional depreciation of Rs. 187,55,71,000.

5. With regard to the second issue, Learned Commissioner has observed that Central Electricity Regulatory Commission (hereinafter referred to CERC )was established under the Electricity Regulatory Commission Act, 1998. The Central Electricity Regulatory Commission is to regulate the tariff of generating companies owned or controlled by the Central Government. The assessee had raised total sales bills of Rs.23,066.30 crores to the customers as per existing norms of CERC. The final order of CERC was not passed during the year, though it was a provisional figure but the assessee has revised the sales downward to Rs.22,128 crores and did not take into account a sum of Rs.938.30 crores. Assessing Officer allowed the assessee to revise the sales downward, without conducting any inquiry about this aspect. Learned Commissioner set aside the assessment order and remitted this issue to the file of the Assessing Officer for fresh examination of this issue.

6. The learned counsel for the assessee while impugning the order of the Learned Commissioner appraised us with the meaning of expression ‘manufacture’ or ‘production’. For buttressing his contentions, he relied upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Sesa Goa Ltd. reported in 279 ITR 331 and India Cine Agency vs. CIT reported in 308 ITR 98. He pointed out that the main controversy for adjudication before the ITAT is whether electricity is a goods and generation is a manufacture. In order to appraise us the meaning of expression ‘goods and manufacture”, he drew our attention towards their dictionary meaning provided in the Oxford English Dictionary and how these expressions have been construed in various authoritative pronouncements of the Hon’ble High Court as well as of Hon’ble Supreme Court. He relied upon the following decisions and placed their copies on the record:

CST Vs. Madhya Paradesh Electricity Board A 1970 S.C 732; State of A.P Vs. NTPC 127 STC 280 (S.C);

Orient Paper vs. Orissa State 42 ELT 552;

CMS (India) Operations vs. CCE 7 STR 369 (CEGAT);

NTPC-SAIL vs. CCE (unreported;

Tamilnadu Cholrates vs. JCIT 98 ITD 1 (Che);

CIT vs. Hi Tech Arai 321 ITR 477 (Mad.);

CIT vs. Texmo Precision Castings 321 ITR 481 (Mad.).

7. The learned counsel for the assessee further drew our attention towards the budget speech of the Hon’ble Finance Minister when he introduced Finance Bill No. 2 of 1980 which contemplates grant of  additional depreciation. He particularly took us through paragraph No. 76 whose copy has been placed on page No. 74 of the paper book. He also took us through Circular No. 281 and pointed out that in paragraph No. 93, it has been observed that in order to stimulate investment during the new five year plan period, the Finance Act has inserted a new clause i.e. (iia) in sub¬section(1) of sec. 32 of the IT Act, which provides for a further deduction in respect of additional depreciation in respect of new machinery or plant installed in certain cases. Thus, according to the learned counsel for the assessee, the main thrust of granting additional depreciation was to stimulate the investment in certain core sectors. The learned counsel for the assessee thereafter appraised us about the scope of section 263 and when Learned Commissioner can exercise such powers. He placed reliance upon the following decisions:

“ CIT vs. Gabriel 203 ITR 108 (Bom.);

Malabar Industrial Vs. CIT 243 ITR 83 (S.C); CIT vs. Honda Siel 333 ITR 547 (Del.);

CIT vs. Vikas Polymers 236 CTR 476 (Del.);

CIT vs. International Travel House 194 TM 324 (Del.); Piem Hotels vs. DCIT 128 ITD 275 (Mum.);

Revenue Principles of consistency

Radhasaomi Satsang vs.CIT 193 ITR 321 (S.C); CIT vs. Neo Poly Pack 245 ITR 492 (Del.).

8. The learned counsel for the assessee while taking us second issue raised by the Learned Commissioner in the show-cause notice submitted that assessee has disclosed all material facts fully and truly. Assessing Officer has passed an assessment order under section 143(3) of the Act. In paragraph (3a) and (3b) of Schedule 21 of the Annual Report for the financial year 2004-05, assessee has disclosed all the material facts. The Learned Commissioner while harboring a belief about the erroneousness of the assessment order which caused a prejudice to the revenue has made reference to these schedules. He pointed out that the tariff for the electricity in respect of NTPC stations was based on Government of India’s Norms up to financial year 2000-01. However, after coming into operation, the Central Electricity Regulatory Commission under the Electricity Regulation Commission Act, 1998, this duty has been assigned to CERC. The CERC, by way of Regulation 2001 notified the terms and conditions of tariff determination for the period 2001 to 2004 and similarly by another regulation of 2004, it notified the terms and conditions for the period 2004-

9. First tariff order for NTPC station for the period 01 to 2004. was issued by CERC in financial year 2003-04. For the period 2004-09, it was issued in financial year 2006-07. Prior to issue of such orders, the CERC issued provisional order for the purpose of billing which is to be retrospectively  adjusted when the final tariff orders are issued. Thus, the assessee raised the bill as per existing norms of CERC but the company has made a bona fide estimate of the sale being realizable as per the expected tariff notification and thus revised the sales. Assessing Officer has accepted this aspect after going through the details. The learned counsel for the assessee argued that this amount cannot be included in the total sales of the assessee because final order of CERC was not available at the end of the accounting year as the rates were provisional. For buttressing his contentions, he relied upon the following decisions:

ED Saroon Vs. CIT 26 ITR 27 (S.C);

CIT vs. Sahrda Sugar 239 ITR 393 (Bom.);

CIT vs. Walchander Industries 262 ITR 212 (Bombay)

9. Learned DR on the other hand submitted that in the show-cause notice issued by the Assessing Officer, he nowhere put a query to the assessee in respect of both these issues which indicate that Assessing Officer has not conducted any inquiry before accepting the accounting entry of the assessee as it is on these two issues. Hence, his order is erroneous which caused prejudice to the revenue. In support of his contentions, he relied upon the judgment of Hon’ble Delhi High Court in the case of CIT vs. Ashok Logani reported in 2011 Taxman.com 208. CIT vs. Nalwa Investment reported in 338 ITR 522, CIT vs. DLF Power Ltd. reported in 17 Taxman.com. 269,  CIT vs. Infosys Technologies Ltd. (Karnataka High Court) 17 Taxman.com 203 and Gee Vee Enterprises vs. Addl. CIT 99 ITR 373. He pointed out that in all these decisions, Hon’ble Delhi High Court has observed that if Assessing Officer has failed to conduct proper inquiry then his order is erroneous and deserves to be set aside. Putting emphasis upon the judgment of Hon’ble Delhi High Court in the case of Ashok Logani, he pointed out that in this case, Hon’ble High Court has observed that Assessing Officer was required to go into the issue in proper perspective and could not be perfunctory in his approach. When CIT set aside an assessment order for further inquiry, the ITAT has a limited jurisdiction and it should confine its discussion focusing on the proprietary of the order of learned CIT invoking his power under sec. 263 of the Act. ITAT need not to go into the merits of the issues by itself which has neither been considered by the Assessing Officer nor by the Learned CIT in the impugned order.

10. With regard to the withdrawal of additional depreciation on merit, Learned DR submitted that the ITAT Chennai has considered this issue in the case of Tamilnadu Chlorates vs. JCIT reported in 98 ITD 1, the decisions referred by the learned counsel for the assessee have been considered by the ITAT in this order and the ITAT has held that electricity cannot be equated with any article or thing, generation of power cannot be construed as manufacture of any article or thing. Thus, Learned Commissioner has rightly withdrew the additional depreciation granted to the assessee. He further relied upon the judgement of Hon’ble Supreme Court in the case of State of Gujarat and Ors. Vs. ESSAR. Oil reported in 2012 TIOL in order to buttress that taxing statute to be construed liberally while exemption to be interpreted strictly. He also relied upon the judgment of Hon’ble Allahabad High Court in the case of CIT vs. Oriental Motor Car CO. Ltd. reported in 3 taxman 567 and the decision of Hon’ble Gujarat High Court in the case of Alambic Chemical Works vs. DCIT reported in 266 ITR 47. Learned DR also relied upon the judgement of Hon’ble Supreme Court in the case of CIT vs. N.C. Budhiraja reported in 204 ITR 412 and apprised us as to how the expression “manufacture and production” are to be construed.

11. We have duly considered the rival contentions and gone through the record carefully. On an analysis of the record, we are of the opinion that basically three issues are to be resolved by us, namely, (a) whether Learned Commissioner has rightly taken cognizance of sec. 263 of the Income-tax Act, 1961 and treated the assessment order as erroneous as well as prejudicial to the interest of the revenue; (b) whether Learned Commissioner has rightly withdrew the additional depreciation claimed and granted by the  Assessing Officer; (c) whether, in case, answer to question No.1 is against the assessee, are we required to go into the merit of the issue regarding allowability of reduction in sales or not?

12. With regard to the first issue, we are of the view that learned representatives have made reference to a large number of decisions. We do not deem it necessary to recite and recapitulate all the decisions on the legal aspect as to how the order of Learned Commissioner passed under sec. 263 is to be judged. The ITAT in the case of The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO,Mumbai reported in 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon’ble Supreme Court in the case of Malabar Industries 243 ITR 83 as well as Hon’ble Bombay High Court rendered in the case of Gabriel India Ltd. reported in 203 ITR 108, has propounded the following broader principle to judge the action of CIT taken under section 263.

“ (i) The CIT must record satisfaction that the order of the A.O is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.

(ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the A,O and it was only when an order is erroneous that the section will be attracted.

(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous.

(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.

(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the A.O has adopted one of the courses permissible under law or where two views are possible and the A.O has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the A.O is unsustainable under law.

(vi) If while making the assessment, the A.O examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s. 263 is not permitted to substitute his estimate of income in place of the income estimated by the A.O.

(vii) The A.O exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion.

(viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction.

(ix) If the A.O has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the A.O allows the claim on being satisfied with the explanation of the assessee, the decision of the A.O cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.”

13. Before embarking upon an inquiry about the facts of the present case and how those facts have been considered by the learned CII, we deem it appropriate to make a reference to the observations of the Hon’ble Delhi  High Court in the case of Vee Gee Enterprises reported in 99 hTR 373 wherein Hon’ble High Court has expounded the approach of the Assessing Officer required to be adopted while passing assessment order. The observations of the Hon’ble High Court read as under:-

“ It is not necessary for the Commissioner to make further inquiries before canceling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statement made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of the return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would made such an inquiry prudent that the word “erroneous” in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.”

14. In the light of above propositions, let us examine the facts of the present case. On page No. 5 of the paper book, volume-I, the assessee has placed on record copy of the questionnaire dated 29.6.2006 issued by the  Assessing Officer. In this questionnaire, Assessing Officer has called for information from the assessee under sec. 142(1) on fifteen counts. With the assistance of learned representatives, we have gone through this questionnaire carefully. Perusal of this questionnaire reveals that Assessing Officer has not a single question on both the issues. Therefore, it suggests that he has not conducted any inquiry on these two issues. The contentions of the assessee is that it has disclosed all material facts fully and truly during the assessment proceedings and assessment has been framed under sec. 143(3) of the Act, therefore, it be presumed that Assessing Officer must have gone through all these details. However, Hon’ble Supreme Court in the case of Malabar Industries, Hon’ble Delhi High Court in the case of Gee Vee Enterprises as well as in the case of Ashok Logani and DLF Power Equipments, it has been held that if the Assessing Officer failed to go into the issues in proper perspective and his approach is perfentory then the order would be termed as erroneous which would ultimately caused a prejudice to the assessee on escapement of income from tax. The judgment of the Hon’ble Delhi High Court in the case of Ashok Logani as well as in the case of DLF Power are the latest decisions on this issue. Similarly, Learned DR has brought to our notice the decision of Hon’ble Delhi High Court dated 15.2.2012 in the case of CIT vs. Regency Park Property Management  Service Pvt. Ltd. reported in 2012 TIOL page 75 where it has been held that if Assessing Officer had not dealt with the details and examined the issues then there was an error on the part of the Assessing Officer upon which action under sec. 263 can be justified. Thus, considering all these aspects, we are of the view that Learned Commissioner has rightly taken cognizance under sec. 263 of the Act because Assessing Officer has not conducted any inquiry on these two issues.

15. Before taking up the second issue, we deem it proper to take the third issue. The learned counsel for the assessee submitted that the company follows the policy of determination of tariff based on the norms as notified by CERC in its regulation and sales are thus provisionally accounted on a realistic base so as to avoid major impact on profit and loss account and balance sheet on the final determination of tariff by CERC. He emphasized that the bills raised by the assessee are liable to be adjusted on the basis of the rates notified y the CERC which usually take substantial time. On the strength of past experience, he pointed out that rates are being finalized after 2 to 3 years. He made reference to page No. 102 of the paper book and pointed out that Learned Commissioner has remitted this issue to the file of the Assessing Officer for fresh adjudication but he failed to point out what prejudice has been caused to the revenue by provisionally reducing the sales. Whatever, the sales bills, assessee has raised to the customers, they are not final. As and when the rates are finalized, the assessee has accordingly given effect in the accounts. Thus, there is no prejudice to the revenue and Learned Commissioner failed to establish the prejudice on the record. He further pointed out that reduction of amount by 983 crores is not a very substantial amount, it is less than 3% of the annual charges. The assessee has been consistently following this practice and in the past it was never disturbed by the revenue. Learned Commissioner failed to look into this aspect. He relied upon the decision of Hindustan Hosiery reported in 161 ITR 524. He also contended that if assessee over charges then it has to refund with interest and if it under charges then it can charge with interest. The Government has 85% stake, accounts are verified by CAG and CAG has not disapproved this accounting practice by the assessee. He also made reference to page 90 of the paper book wherein reply of the assessee was given to the Assessing Officer during the assessment proceedings and he submitted that all these aspects were brought to the notice of the Assessing Officer. On the other hand, Learned DR pointed out that in the show-cause notice issued under section 142(1), Assessing Officer has neither raised query on this issue nor any finding is discernible from the assessment order or from the Learned Commissioner’s Order with regard to inclusion or exclusion of these amounts from the sales. Therefore, it is not adviseable at the end of ITAT to take up this issue and record a finding on merit.

16. On due consideration of all these facts and circumstances, we are of the view that learned Assessing Officer has not put any query to the assessee about the reduction of the sales provisionally. As far as the reference to page No.90 is concerned, the assessee has given an explanation with regard to different issues wherein it has pointed out about the provisional revision of the sales, but Assessing Officer has not called for the information on this issue nor examined it. Even if the details are available on the record, there is no application of the mind at the end of the Assessing Officer. Thus, his order is erroneous. As far as the second condition i.e. whether any prejudice has been caused to the revenue or not is concerned, we find that Learned Commissioner has recorded a finding that permitting the assessee to reduce the sales without examining the issue, whether the assessee can reduce it or not would result a loss to the revenue, prima facie, there is an escapement of income. Though Learned Commissioner has not examined the issue on merit but the discussion prima facie indicates his formation of opinion about the loss of revenue. He remitted it to the file of the Assessing Officer after  satisfying himself that the record cry for an inquiry on this issue. Hon’ble Delhi High Court in the case of Ashok Logani (supra) has specifically observed in paragraph 14 of the judgment that if the matter was relegated to the Assessing Officer to conduct an inquiry then ITAT itself should not take up that inquiry in its hands and adjudicated the issue on merit and thereafter judge the order of the Learned Commissioner. In such circumstances, ITAT has a very limited scope and it should focus its discussion on the proprietary of the order of the Learned Commissioner. At the time of hearing, we have confronted the learned counsel for the assessee that if the Assessing Officer failed to conduct an inquiry then assessment order can be termed as erroneous which ultimately caused a prejudice to the revenue and deserves to be set aside, then learned counsel for the assessee submitted that if hundred items are there in computation of income and no inquiry was conducted by the Assessing Officer on certain items then can the assessment order be erroneous. In our opinion if an verification of the record, Learned Commissioner formed an opinion that an issue available in the computation of income required verification and investigation at the end of Assessing Officer before its acceptance or rejection and such inquiry was not conducted than and an error has crept in the assessment order. If such an error caused a prejudice to the revenue than assessment order on such issue  could be set aside. Therefore, in view of the above discussion, we are of the view that on reduction of sales Learned CIT has rightly taken cognizance u/s. 263 and has rightly remitted this issue to the Assessing Officer for fresh adjudication.

17. The next question for our adjudication is whether Learned Commissioner has rightly withdrew the additional depreciation claimed by the assessee and granted by the Assessing Officer? As discussed earlier, the assessee has claimed additional depreciation for the first time amounting to Rs.187,55,71,000. Learned Commissioner withdrew this additional depreciation on the ground that Assessing Officer has not conducted inquiry before allowing this depreciation. On merit, Ld. Commissioner has observed that assessee is engaged in the activity of generation of power. Section 32(1)(IIa) of the Act provides additional depreciation to those undertaking which are engaged in the business of manufacture or production of any article or thing. According to the Learned Commissioner, other businesses are not eligible to claim the benefit. He observed that generation of power cannot be equated with the production of article or thing because article or thing in common parlance is known something tangible and moveable etc. Generation of power is giving energy as output and, therefore, this activity is  nowhere similar to production of article or thing because an article or thing is always associated with the concept of weight, mass and volume. The power or electricity does not have any of these attributes. It has no volume and it does not occupy any space, no weight or no mass can be attributed to it. The learned counsel for the assessee in order to appraise us the meaning of expression ‘manufacture and production made reference to the decision of Hon’ble Supreme Court in the case of Sesa Goa Ltd. and India Cine Agency (supra)

18. In the case of India Cine Agency, Hon’ble Supreme Court has considered the judgment rendered in the case of Sesa Goa (supra) and all other decisions on the point which contemplate the meaning of expression “manufacture” as well as “production”. The relevant discussion made by the Hon’ble Court reads as under:

“2. As noted above, the core issue is whether activity undertaken was manufacture or production.

3. In Black’s Law Dictionary (5th Edition), the word “manufacture’ has been defined as, “the process or operation of making goods or any material produced by hand, by machinery or by other agency; by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine”. Thus by process of manufacture something is produced and brought into existence which is different from that, out of which it is  made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. (See Dy. CST (Law), Board of Revenue (Taxes) Coco Fibres [1992] Supp. 1 SCC 290).

4. Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. (See Collector of Central Excise v. Rajasthan State Chemical Works [1991] 4 SCC 473).

 x x x x x x x x x x x

7. To put it differently, the test to determine whether a particular activity amounts to “manufacture’ or not is: Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes ‘manufacture’ takes place and liability to duty is attracted. Etymologically the word ‘manufacture’ properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Ltd. v. Union of India [1985] 3 SCC 314).

x x x x x x x x x x x

x x x x x x x x x x x

19. In this case, assessee was carrying on business of conversion of Jumbo Rolls of photographic films into small flats and rolls in desired sizes. It claimed deduction under sec. 80-HH and 80-I as well as investment allowance under sec. 32AB. The controversy arose whether conversion of jumbo rolls into small sizes amounts to manufacture or production, eligible for deduction under sec. 32AB or deduction under sections 80-HH and 80-I of the Income-tax Act, 1961/ Hon’ble Supreme Court has held that this activity amounts to manufacture or production. Thus, we think it is not necessary to recapitulate and recite all the decision on the construction expression “manufacture”. But suffice to say that core of all the decisions of the Hon’ble Supreme Court or Hon’ble High Court is to the effect that broadly manufacture is a transformation of an article, which is commercially different from the one which is converted. It is a change of one object to another for the purpose of marketability. It brings something into existence, which is different from that, which originally existed. The new product is a different commodity physically as well as commercially. The Hon’ble Court also explained broader test to determine whether manufacture is there or not, it is propounded that when a change or series of changes are brought out by application of processes which take the commodity to the point where, commercially, it cannot be regarded as the original commodity but is, instead recognized as a distinct and new article that has emerged as a result of the process.

20. As observed earlier, Learned Commissioner withdrew the additional depreciation primarily on the ground that power/electricity generated by the assessee cannot be equated with an article or thing which is being  manufactured in an industrial undertaking. The learned counsel for the assessee in order to buttress his arguments, power/electricity generated by the assessee is an article or goods, made reference to the decision of Hon’ble Supreme Court in the case of CST Vs. MP Electricity Power. In this case, the MPEST Board sold, supplied and distributed electric energy to various consumers. It also sold coal-ash, a waste product and supplied stream to Nepa Mills of Burhanpur. The sale of electricity is exempt from sales-tax. However, for the purpose of determining the gross turn over, the sale of electric energy is to be taken into account. The first question which arose before the Honble Court was;

“On the facts and circumstances of the case whether or not the Madhya Pradesh Electricity Board is a dealer with in the meaning of Section 2© of the C.P. and Bare Sales-tax Act, and section 2(d) of the Madhya Pradesh General Sales-tax Act, 1958, in respect of its activity of generation, distruption, sale and supply of electric energy?”

20.1 In order to decide whether Madhya Pradesh Electricity Board is a dealer or not, Hon’ble Court took into consideration the definition of “dealer” as given in the two acts referred in the question and observed that the definition contemplates that any person who carries on the business of buying, selling, supplying or distributing the goods as a “dealer”. The  expression “goods” are defined by section 2(d) of the Act, 1947 according to which all kinds of moveable properties other than actionable claim and include material articles and commodities whether or not to be used in the construction, fitting out, improvement or repair of immoveable property. According to the Hon’ble Court, the definition of expression “goods” contained in section 2(g) of the Act No. 11 of 1959 has almost similar. In the light of these definitions, Hon’ble Court has examined whether electricity can be termed as a goods. The discussion made by the Hon’ble Court in the judgment reads as under:

“The reasoning which prevailed with the High Court was that a well-defined distinction existed between the sale or purchase of “goods” and consumption or sale of electricity; otherwise there was no necessity of having Entry No.53. But under Entry 53 taxes can be levied not only on sale of electricity to derive much assistance from the aforesaid entries. What has essentially to be seen is whether electric energy is “goods” within the meaning of the relevant provisions of the two Acts. The definition in terms is very wide according to which ‘goods’ mean all kinds of movable property. Then, certain items are specifically excluded or included in electric energy or electricity is, not one of them. The term “moveable property” when considered with reference to “goods” as defined for the purposes of sales tax cannot be taken in a narrow sense and merely because electric energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot be cease to be movable property when it has all the attributes of such property. It is needless to repeat that it is capable of abstraction, consumption and use which, if done dishonestly, would attract punishment under sec. 39 of the Indian Electricity Act, 1910. It can be transmitted, transferred, delivered stored, possessed etc. in the same way as any other movable property. Even in Banjamin on Sale, 8th Edn., reference has been made at page 171 to Country of Durham Electricial, etc., Co. v. Inland Revenue(1) in which electric energy was assumed to be “goods”. If there can be sale and purchase of electric energy like any other moveable object we see no difficulty in holding that electric energy was intended to be covered by the definition of “goods” in the two Acts. If that had not been the case there was no necessity of specifically exempting sale of electric energy from the payment of sales tax by making a provision for it in the Schedules to the two Acts. It cannot be denied that the Electricity Board carried on principally the business of selling, supplying or distributing electric energy. It would therefore clearly fall within the meaning of the expression “dealer” in the two Acts”.

20.2 This question again fallen for the consideration of the Hon’ble Supreme Court in the case of State of Andhra Pradesh Vs. NTPC. The dispute in this case was that respondent NTPC had a thermal power station at Ramagundam within the State of Andhra Pradesh and sold the electricity to the Board of Karnataka, Kerala, Tamilnadu and the State of Goa in pursuance of contract of sales occasioning interstate movement of electricity. The Andhra Pradesh Government wanted to levy of duty on certain sales of electric energy. According to the understanding of Andhra Pradesh Government, section 3 of their Sales-tax Act provides that every distributor of electric energy and every producer shall subject to certain exceptions pay every month to the State Government a duty calculated at the rates specified in the table appended thereto on the units of electric energy sold or supplied to a consumer or consumed by himself for his own purpose or for the purpose of his township or colony during the preceding months. Similar steps were taken by the Madhya Pradesh Government for the plants situated in its territorial jurisdiction. The question arose whether electricity sold to other states would be amenable to duties. The Hon’ble Court in that context considered, what is an electric energy and made following observations:

“Before we deal with the constitutional aspects let us first state what electricity is, as understood in law, and what are its relevant characteristics. It is settled with the pronouncement of this Court in Commissioner of Sales-tax, Madhya Pradesh, Indore Vs. Madhya Pradesh Electricity Board, Jabalpur- 1969 (2) SCR 939 that electricity is goods. The definition of goods as given in Article 366(12) of the Constitution was considered by this Court and it was held that the definition in terms is very wide according to which “goods” means all kinds of moveable property. The term “moveable property” when considered with reference to “goods” as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because  electricity energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot be cease to be moveable property when it has all the attributes of such property. It is capable of abstraction, consumption and use which if done dishonestly is punishable under sec. 39 of the Indian Electricity Act, 1910. If there can be sale and purchase of electrical energy like any other moveable object, this Court held that there was no difficulty in holding that electric energy was intended to be covered by the definition of “goods”. However, A.N. Grover, J. speaking for three-Judge Bench of this Court went on to observe that electric energy “can be transmitted, transferred, delivered, stored, possessed etc. in the same way as any other moveable property”. In this observation we agree with Grover, J. on all other characteristics of electric energy except that it can be ‘stored’ and to the extent that electric energy can be ‘stored’, the observation must be held to be erroneous or by oversight. The science and technology till this day have not been able to evolve any methodology by which electric energy can be preserved or stored.

Another significant characteristic of electric energy is that its generation or production coincides almost instantaneously with its consumption. To quote from Aiyar’ s Law Lexicon (Second Adition, 2000)__ ‘Electricity in physics is “the name given to the cause of a series of phenomena exhibited by various substances, and also to the phenomena themselves.” Its true nature is not understood. Imperial Dict. (quoted in Spensley v. Lancashire Ins. Co., 54 Wis. 433, 442, 11 NW 894, where the court, quoting from the same authority, said, “We  are totally ignoran of the nature of this cause whether it be a material agent or merely a property of matter. But as some hypothesis is necessary for explaining the phenomena observed, it has been assumed to be a highly subtle, imponderable fluid, identical with lightning, which pervades the pores of all bodies, and is capable of motion from one body to another.’ This characteristic quality of electric energy was judicially noticed in Indian Aluminium Co. etc. etc. Vs. State of Kerala & Ors (1996) 7 SCC 637. Vide para 25 this court has noted, “Continuity of supply and consumption starts from the moment the electrical energy passes through the meters and sale simultaneously takes place as soon as meter reading is recorded. All the three steps or phases (i.e. sale, supply and consumption) take place without any hiatus. It is true that from the place of generating electricity, the electricity is supplied to the sub-station installed at the units of the consumers through electrical higher-tension transformers and from there electricity is supplied to the meter. But the moment electricity is supplied through the meter, consumption and sale simultaneously take place. “as soon as the electrical energy is supplied to the consumers and is transmitted through the meter, consumption takes place simultaneously with the supply. There is no hiatus in its operation. Simultaneously sale also takes place.” These properties of electricity as goods are of immense relevance as we would state hereafter”.

21. On due consideration of these two decisions, it is implicitly clear that the Hon’ble Supreme Court has explained the meaning of electricity, the Hon’ble Court has considered the definition of goods as given in Article 366(12) of the Constitution of India. It also took into consideration the sales-tax Act of the State of Andhra Pradesh as well as Madhya Pradesh and also considered the dictionary meaning. Thereafter Hon’ble Court has observed that goods means, all kind of moveable properties. The terms moveable property when considered with reference to goods as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because electric energy is not a tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be moveable property when it has all the attributes of such properties. It is capable of abstraction, consumption and use of which if done dishonestly is punishable under sec. 39 of the Indian Electricity Act. If there can be sales and purchase of electric energy like any moveable object than there was no difficulty in holding that electric energy was intended to be covered by the definition of goods.

22. The expression “article, thing or goods” are not defined in the Income-tax Act, 1961. Learned Commissioner while treating the electricity as not an article or thing has not made reference to any provisions of the Income-tax Act, 1961, he simply construed the meaning of electricity as not article or thing on the basis of his own inference drawn from the nature of  this item but if we evaluate the conclusion drawn by the Learned Commissioner in the light of the decision of the Hon’ble Supreme Court given in the case of Indian Cine Agency, CST Vs. M.P. Electricity Board and Sate of Madhya Pradesh Vs. NTPC then it would suggest that electric energy has all trapping of an article or goods. The process of its generation is also akin to manufacture or production of an article or thing. It is being generated in huge plants though scientifically one may say it is transformation of one source of energy into the other. But all these aspects have been considered in these three judgments of the Hon’ble Supreme Court wherein Hon’ble Court has explained what is manufacture or production and what is electricity. Learned DR at the time of hearing, had made reference to the order of the ITAT, Chennai and the judgment of the Hon’ble Supreme Court in the case of NC Budhiraja. As far as the judgment of the Hon’ble Supreme Court in the case of N.C. Budhiraja is concerned that has been considered by the Hon’ble Supreme Court itself in the case of Indian Cine Agency (supra). The ITAT in the case of Tamilnadu Chlorates has considered the admissibility of deduction under section 80-HH and in that test held that electricity is not an article. The ITAT has not dealt with these two judgments extensively rather simply observed that decision in the case of Madhya Pradesh Electricity Board was given in the context of the  language of a particular statute. The only discussion made by the ITAT with regard to these two judgments of the Hon’ble Supreme Court reads as under:

“6. Reference was made to the decisions of Apex Court rendered in the case of M.P. Electricity Board 35 STC 188 (sic). In this case it was held that electricity is goods within the meaning of section 2(3) of Central Province and Virar Sales-tax Act. This decision was rendered in the context of the language of a particular statute. As such this meaning cannot be extended to the facts of the present case”.

23. Thus, taking into consideration all these aspects, we are of the view that admissibility of additional depreciation cannot be denied to the assessee merely on the ground that electricity is not an article or thing. The order of the Learned CIT(Appeals) is reversed to this extent and the disallowance is deleted.

24. In the result, the appeal of the assessee is partly allowed.

Decision pronounced in the open court on 30.04.2012

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