Deduction u/s. 80-IA(4)(iv)(c) is available in respect of capital work-in-progress

IN THE ITAT BANGALORE BENCH ‘A’

Bangalore Electric Supply Co. Ltd.

versus

Deputy Commissioner of Income-tax, Circle 11(2), Bangalore

IT Appeal No. 359 (Bang.) of 2009

[Assessment year 2005-06]

Date of Pronouncement – July 4, 2012

ORDER

N.V. Vasudevan, Judicial Member 

This appeal by the assessee is against the order dated 10.02.2009 of the CIT(Appeals)-I, Bangalore relating to assessment year 2005-06.

2. The only issue that arises for consideration in this appeal is as to whether the assessee is entitled to claim deduction u/s. 80-IA(4)(iv)(c) of the Income-tax Act, 1961 (“the Act”).

3. The assessee is a wholly owned Government of Karnataka Undertaking. It is an electricity distribution company. The assessee claimed deduction 80-IA(4)(iv)(c) of the Act in respect of the profits derived from the distribution of power at 100% of the gross total income. Section 80-IA provides that where the gross total income of the assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4), there shall, in accordance with and subject to the provisions of section 80-IA, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100% of the profits and gains derived from such business for ten consecutive assessment years. The Assessee claimed deduction under section 80- IA(4)(iv)(c) of the Act. Those provisions read as follows:-

“(4) This section applies to ………….

(iv) an undertaking which, ………….

“(c) undertakes substantial renovation and modernization of the existing network of transmission or distribution lines at any time during the period beginning on the 1st day of April 2004, and ending on 31st day of March, 2010.

Explanation: for the purposes of this sub-clause, “substantial renovation and modernisation” means an increase in the plant and machinery in the network of transmission or distribution lines by at least fifty per cent of the book value of such plant and machinery as on the 1st day of April, 2004″.

4. The Assessee claimed that it had during the previous year relevant to AY 05-06 undertaken substantial renovation and modernization and therefore was entitled to claim deduction u/s.80-IA(4)(iv)( c) of the Act. There is no dispute that the Book Value of Lines, cable Networks as on 1.4.2004 was as under:

5. To claim deduction u/s.80-IA(4)(iv)( c) of the Act, the Assessee had to Assessee had to achieve an increase in the book value of the fixed assets – plant & machinery viz., Lines, Cable Network by at least 50% of the book value of such plant & machinery as on 01.04.2004 i.e., an minimum increase of Rs.271.85 Crores.

(a) As on 31.3.2005, the additions to the lines, cable network as per the books of accounts was as follows:

(b) Capital Works-in-Progress (CWIP) (Assets of capital works in the course of construction or acquisition) Schedule 7 to the Audited Balance Sheet

(c) Total Gross Block of Lines Cable, Nework ( a + b)

According to the Assessee the increase in book value as aforesaid was more than 50% of the book value as contemplated by the provisions of Sec.80-IA(4)(iv)(c) of the Act and therefore deduction as claimed by the Assessee should be allowed.

6. Shred of all technicalities, the claim of the Assessee was that CWIP to the extent of Rs. 118.84 Crores, should also be considered as increase in the plant and machinery in the network of transmission or distribution lines. The Revenue’s claim is that when an item of expenditure is treated as capital works in progress in the books of accounts it cannot be said to be an increase in the plant and machinery. The situation is that the Assessee has placed orders for purchase of cables and awarded contracts for carrying out civil work for erection of transmission and distribution lines but the work is not complete and is in progress. Hence in the books of accounts the said expenditure (which is a sum of Rs.118.84 crores given in the table in the earlier para of this order) is not capitalized and shown as value of plant and machinery but is shown as capital work in progress. The question is whether Capital Work in Progress can also be considered as book value of plant and machinery for allowing deduction u/s.80-IA(4)(c) of the Act.

7. The case of the Assessee is that the provisions of Sec.80-IA(4)(c) of the Act contemplates deduction to an Assessee who “Undertakes”. According to the Assessee by placing order for purchase of cable and transmission lines and entering into contract for carrying out civil work, the Assessee has undertaken substantial renovation and therefore the deduction should be allowed. The case of the revenue is that the provisions of Sec.80-IA(4)(c) of the Act says that there should be “Increase” in the value of plant and machinery in the books of accounts and such increase can be said to be real only when the renovation or modernization is complete and not when the same is in progress. In this regard, it is relevant to point out that the aforesaid deduction is available for a period of 10 years from the year in which the renovation and modernization takes place. Another reasoning of the revenue is that the deduction in question is allowed only to encourage modernization so that transmission losses are reduced and operational efficiency increases and therefore the deduction should be allowed only when the renovation is completed and put to use. The revenue has allowed deduction to the Assessee in the subsequent A.Y. and for 10 years from AY 06-07, the Assessee will get deduction. The Assessee however wants to claim the deduction from AY 05-06. The dispute therefore boils down to the first year in which deduction has to be allowed. Ultimately, neither the revenue nor the Assessee will be at any loss. Nevertheless the question as to whether the conditions laid down in Sec.80-IA(4)(iv)( c) are satisfied or not has to be decided.

8. Before CIT(A), the Assessee pointed out that it had undertaken contract work under the Accelerated Power Development Reforms Programme (APDRP) as per the guidelines framed by the Ministry of Power, Government of India for strengthening, upgradation and modernization of existing lines and cable network system to the extent of Rs. 339.16 Crores during the FY relevant to AY 05-06. It was further submitted that the nature of renovation and modernization works in the lines and cable network of distribution lines and the progress of works at various stages for which the Assessee had substantially incurred amounts by way of payments to contract suppliers as advance or by way of capital work-in-progress or capital goods stock apart from capitalization of such lines and cables in the Block of Fixed Assets was to the extent of Rs. 194.40 Crores. It was claimed by the Assessee that though a sum of Rs. 118.84 Crores was shown as capital assets work in progress in the Balance sheet the same had to be considered as part of the fixed assets. It was the claim of the Assessee that as per AS-10 issued by the ICAI (Institute of Chartered Accountants of India), accounting for fixed assets, states that capital work-in-progress for capital expenditure incurred on account of fixed assets during the course of construction or acquisition has to be separately shown under the gross block of fixed assets. The Assessee also relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Karnataka Power Corpn. [2001] 247 ITR 268  wherein the Hon’ble Supreme Court in the context of relief u/s.80J of the Act held that capital work in progress is to be treated as capital works of fixed assets.

9. The CIT(A) however concurred with the view of the AO. He also held that the decision of the Hon’ble Supreme Court in the case of Karnataka Power Corpn. (supra) was in the context of the provision of Sec.80J of the Act where deduction was allowed as a percentage of “capital employed in the industrial undertaking” and in that context the Hon’ble Apex Court held that the moment an asset is acquired or purchased it has be considered as employed in business. The CIT(A) held that the aforesaid decision would therefore not be relevant in the present case.

10. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. The issue that arises for consideration in this appeal is as to whether the sum which is shown as CWIP in the balance sheet can be considered as plant & machinery as per the books for the purpose of allowing deduction u/s. 80-IA(4)(iv)(c) of the Act. In this regard, our attention was drawn to Schedule-06 and 7 of the Balance sheet. Schedule-7 to the balance sheet, shows the value of CWIP as follows:-

“Schedule: 07 Capital Works in Progress

11. The claim of the Assessee is that a sum of Rs.118.84 Crores out of the above is capital expenditure incurred for modernization and renovation of the existing cable/network and they were to be considered as part of the fixed assets. It was submitted that in Schedule-11 to the balance sheet, advance to suppliers and advance to contractors have bee shown as loans & advances. Our attention was drawn to Accounting Standard (AS-10) of Institute of Chartered Accountants of India (ICAI) wherein, it has been opined as follows:-

“Determination and Disclosure of Capital WIP when Outside Contractor is Hired:

The amount at which capital work-in-progress should be recognised by the company should reflect the stage of contract performance. As the progress payments to the contractor may not necessarily reflect the stage of contract performance, accounting for capital work-in-progress based on progress payments would not be appropriate. In order to recognise capital work-in-progress based on the stage of contract performance, it is essential that such stage should be capable of being reasonably estimated. The stage of contract performance at a given point of time may comprise two elements: work certified by the company and work not yet so certified. As far as the work not certified is concerned, it should be included in capital work-in-progress only if a reliable estimate thereof can be made. If such is not the case, the capital work-in-progress should be recognised based on the work certified only. Progress payments and advances paid to the contractor not so far adjusted to capital work-in-progress should be reflected as capital advances in the financial statements.”

12. It was submitted that in case of the assessee, the CWIP had been certified and in view of the aforesaid Accounting Standard, the same was shown as CWIP, but otherwise it implies that there was substantial completion. Apart from the above, it was submitted that the provisions of section 80-IA(4)(iv)(c) talks about the assessee undertaking substantial renovation. The meaning of the word “undertaking” as per the law lexicon was quoted and it says:-

“Undertake: To engage to look after or attend to. To endeavor to perform or try, to promise, to finalise, engage, agree or assume an obligation. To lay oneself under an obligation or to enter into stipulation, to perform or to execute, to convenient, to contract.”

It was therefore submitted that the deduction claimed ought to have been allowed. It was submitted that it was not the intention of the legislature that the entire renovation and modernisation of the existing lines and cable network has to be completed and put to use.

13. The ld. DR was relying on the order of the ld. CIT(Appeals) and submitted that the intention of the legislature was only to give deduction after increase in the value of plant & machinery as recognized in the books of account. It was submitted by him that reliance placed by the ld. counsel for the assessee on the provisions of section 80J and drawing a parallel between those provisions and section 80-IA(4)(iv)(c) of the Act was not justified, as the provisions of section 80J were intended to encourage capital investment and it was not related to the profits of the undertaking.

14. We have considered the rival submissions. As we have already seen, the deduction u/s. 80-IA(4)(iv)(c) is allowed for a period of ten years. The dispute in the present appeal is as to whether assessment year 2005-06 should be the first year in which the deduction should be allowed. It was clarified at the time of hearing of the appeal that from the A.Y. 2006-07, the assessee has been getting the deduction u/s. 80-IA(4). It is no doubt true that the provisions talk about undertaking substantial renovation and modernisation of existing network of transmission or distribution lines by the electricity distribution company. The Explanation, however, defines what is substantial renovation and modernisation and it lays down that the value of transmission and distribution lines should increase as per the books, at least by 50%, compared to the book value as on 01.04.2004. Admittedly, as per the books of account, this criterion was not satisfied. The assessee however seeks to rely on the expenditure incurred during the previous year which were in connection with renovation and modernization of cable and transmission line which were not complete and were in progress and therefore classified as CWIP. The fact that they were shown as CWIP in the books of account would only mean that renovation and modernisation of the existing transmission or distribution lines had not been recognized as complete. We accept the submission of the ld. DR that the provisions of section 80-IA(4)(iv)(c) of the Act are meant to encourage modernisation and upgradation of plant & machinery in power sector within a specified period in order to ensure wider network and prevention of transmission losses. This objective is sought to be achieved by prescribing a criterion of increase in the book value of the transmission or distribution lines, which are treated as plant & machinery by the electricity supply company, compared to the book value as on 01.04.2004. We are, therefore, of the opinion that the capitalisation of the expenditure on renovation and modernisation in the books of account is a condition precedent for allowing claim of deduction u/s. 80-IA(4)(iv)(c) of the Act. The further condition that the same should be put to use, in our opinion is not correct as there is no such condition in those provisions. Such condition is expressly provided for allowing depreciation u/s.32 of the Act. There is no such specific condition in Sec.80-IA(4)(iv)(c) of the Act. Reliance placed by the ld. counsel for the assessee on the Accounting Standard and the reasons for classifying certain items of expenditure as CWIP, cannot be accepted and in any event, the provisions of the Act do not contemplate such expenditure being treated as substantial renovation & modernisation. As already stated above, the expression “undertakes substantial renovation and modernisation” cannot be read in isolation and has to be read along with Explanation to section 80-IA(4)(iv)(c) of the Act and if so read, keeping in mind the legislature’s intention behind allowing the deduction, we are of the view that the revenue authorities were justified in holding that the assessee has not satisfied the condition for allowing the deduction. We do not find any ground to interfere with the order of the ld. CIT(Appeals).

15. Consequently, the appeal by the assessee is dismissed.