HIGH COURT OF BOMBAY
Commissioner of Income-tax-10
Versus
Reliance Energy Ltd.
IT Appeal NO. 6792 OF 2010
NOVEMBER 26, 2012
JUDGMENT
M.S. Sanklecha, J. – This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 (the Act) challenges the order dated 14.05.2010 of the Income Tax Appellate Tribunal (the Tribunal) relating to the Assessment Year 2003-2004.
2. The order dated 14.05.2010 of the Tribunal disposes of two appeals of the revenue for assessment years 2001-02 and 2003-04. The issue arising in both the assessment years is with regard to reopening of assessment under Sections 147 and 148 of the Act. However the two appeals with regard to assessment year 2001-02 (being appeal No.6791of 2010) and the present appeal are being disposed of by separate orders as appeal No.6791 of 2010 with regard to assessment year 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.
3. The Revenue has formulated the following questions of law for the consideration of this Court.
(a) Whether on the facts and circumstance of the case and in law, the Tribunal was correct in upholding the order of the CIT(A) in cancelling the notice u/s. 148 and the assessment u/s. 147 holding that the re-assessment proceedings initiated based merely of change of opinion without taking into consideration that Explanation 1 to Section 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 Committee (MERC) circular which prescribed the ‘reasonable rate of return’ earned by the assessee on the basis of which tariffs of electricity was to be calculated and on the basis of which the Assessing Officer has now reworked out the eligible profit for deduction ?
(c) Whether on the facts and circumstance 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 re-opened 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?
4. 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, with effect from assessment year 1996-97 it commenced generation of electricity from its plant at Dahanu. As a consequence of establishing of plant for generation of electricity the respondent became entitled to deduction under Section 80IA of the Act.
5. For the assessment year 2003-2004, the respondent had filed its return of income, which was assessed on 24.05.2005 under Section 143(3) of the Act. The Assessing officer by order dated 24.05.2005 determined the respondent’s income under the normal provision at Rs. 34.91 crores and under Section 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.
6. On 31.03.2008, a notice was issued by the appellant under Section 148 of the Act to the respondent seeking to reopen the assessment for the assessment year 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 A.Y. 2003-04 on 28.11.2003 declaring total income at Nil and taxable income u/s 115JB at Rs. 14,24,89,782/-. The assessment order u/s 143(3) of the Act has been passed on 24.05.2005 assessing the total income under normal provisions of the Act at Rs. 34,91,44,430/- and u/s 115JB of the Act at Rs. 2,15,78,29,379/. In the same assessment order, the assessee has been allowed the deduction u/s. 80IA 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.
Section 80IA (10) of the I.T. 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 there from.
Tariff for purchase of sale of power is determined on the basis of the normative parameters determined by the Govt of India under its Notification No. SO 251(E) dated 30.03.1992 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 at the rate of 16% of such capital. In this case, the assessee has claimed the deduction u/s 80IA of the Act in respect of generation of power from its power unit located at Dahanu. While filing the return of income for AY 2001-02, the assessee was aware that the profit should not exceed the 16% of its capital during the PY in view of the principles which are the basis for the fixation of tariff. However, the assessee has claimed the deduction u/s 80IA of the Act on the profits of Dahanu Unit which exceeded 16% of its capital. Though the MERC order in case No. 18 of 2003 was not passed till the date of passing of the order u/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% in view of the act (Supra) the claim of deduction u/s 80IA 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 u/s 80IA 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 AY 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 :
