DECIDED BY: ITAT, `D’ BENCH : MUMBAI, IN THE CASE OF: Reliance Energy Ltd. Vs. DCIT, APPEAL NO: ITA Nos. 4629, 4630, 4702 & 4703 /Mum/2009, DECIDED ON May 14, 2010
PER B RAMAKOTAIAH, AM
These cross appeals by the Revenue and the assessee are against the order of the CIT (A)-I Mumbai dated 2.6.2009 for assessment years 2001-02 and 2003-04. The issue in the appeals by the revenue is with reference to the action of the CIT (A) in holding that the initiation of reassessment proceedings u/s.147 of the Act as invalid and consequent cancellation of reassessment proceedings as bad in law. The issues in the appeals by the assessee are on merits of the additions made by the Assessing Officer in the reassessment proceedings. Consequent to the decision of the CIT (A) holding that the initiation of reassessment proceedings u/s.147 of the Act as invalid and consequent cancellation of reassessment proceedings as bad in law, he did not deal with merits of the addition made in the reassessment proceedings. The Assessee in its appeals has prayed that even on merits, the additions made by the Assessing Officer in the reassessment proceedings are unsustainable. We shall first take up for consideration the appeals by the Revenue.
2. The facts and circumstances giving raise to the appeals by the Revenue are as follows:
The assessee is a company. It is engaged in business of generation and distribution of electricity. Originally the company was only in distribution of electricity in the suburbs of Mumbai. Subsequently in A.Y. 1996-97 it had put up a plant for generation of electricity at Dahanu. The company was entitled to deduction u/s 80IA in respect of income from generation of electricity at Dahanu. The relevant section reads as follows:
[Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. (2) to (3)…….
(i) To (iii)
(iv) an undertaking which,—
(a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March,2011;
The claim for deduction u/s 80IA was made in AY 2000-01 and subsequent years. We have already seen that the Assessee was distributing power prior to its commencing the business of generation and distribution of power. The activity of distribution of electricity was not entitled to the benefit of deduction u/s.80-IA(4) of the Act. In its business of distribution of electricity prior to its activity of generation and distribution of electricity, the Assessee was purchasing electricity from Tata Power Companies (TPC) and distributing it. After the commencement of generation of electricity at Dahanu, the company continued to purchase the electricity from TPC as the generation of electricity at Dahanu was only 500 MW whereas the supply in Mumbai region was more than 1200 MW. The Assessee did not sell the electricity that it generated at Dahanu to outsiders but utilized the entire generation in the existing business of distribution of electricity in Mumbai. The company in AY 2000-01 had computed the profit on generation of electricity at Dahanu by taking the average selling price realized from the consumers in Mumbai. The average price was arrived at by dividing the total revenue by the actual power consumed by the consumers. The Assessing Officer in AY 2000-01 did not accept the above method of working of profit of Dahanu Unit as in his view the company was not entitled to the deduction u/s 80IA on the distribution activity. The Assessing Officer held that the company was entitled to deduction only in respect of generation of electricity at Dahanu and the profit / loss in respect of distribution activity from the common inter connect point of electricity acquired from Dahanu and TPC to the point of consumers was not entitled to the benefit. The Assessing Officer adopted the average purchase price paid to TPC by the Assessee as “market value’ of the goods supplied by eligible business-generation of electricity at Dahanu to its non eligible business- distribution thereof. The Assessing Officer applied section 80IA(8) which provides that the goods transferred from one business to another business of the same assessee should be at its market value to ascertain the profit eligible for deduction u/s 80IA. The provisions of Sec.80-IA(8) read as follows:
Sec.80-IA ( 8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes
of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date :
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.
In working out the price paid to TPC by the company, the Assessing Officer included the standby charges paid to them in respect of assured uninterrupted supply of electricity. Stand by charges are nothing but an extra payment which the Assessee makes to TPC over and above the price paid for the units of electricity supplied by TPC to ensure that the supply of power by TPC is uninterrupted. However, there was a dispute between the company and TPC regarding the amount payable as standby charges. The Assessing Officer included undisputed standby charges in working out the price. The company was claiming that the disputed portion of standby charges should also be included in working out the market price. The above issue of average consumer selling price vs TPC price, being the market value as provided in section 80IA(8), was decided by CIT (A). The CIT (A) had upheld the Assessing Officer’s order and rejected the company’s contention to consider average consumer selling price. Thus the TPC price was considered as market price for the purpose of section 80IA(8). However, the issue regarding disputed standby charges was appealed to the Tribunal. When the appeal was pending, the matter was resolved between TPC and the company and a compromise was reached on the amount of standby charges. The Tribunal in AY 2000-01 held that the amount finally settled between the company and TPC should be included for working out the average price paid to TPC and that should become the market value for computing profit of generation unit at Dahanu for the purpose of deduction u/s 80IA. The assessments in the later years was also completed on the same basis as the assessee company accepted the CIT(A) order on the issue of adopting price paid to TPC. Thus the amount on which the Assessee would be entitled to deduction u/s.80-IA(4) was thus determined in the assessment proceedings u/s.143(3) of the Act.
3. However, the Revenue Audit in their report considered the reasonable return worked out by MERC and observed that the profit eligible for deduction u/s 80IA has to be worked out based on reasonable return. Since the reasonable return figure was for the combined activity of generation and distribution, Audit observed that the profit determined in the MERC order should be allocated in the ratio of power generated at Dahanu and total power supplied by the company. Consequent to the audit objection, the Assessing Officer reopened the assessments for the above two impugned assessment years. It was the assessee’s objection that a similar issue was considered by the Assessing Officer in the original assessment order, which underwent the process of appeal before the CIT (A) and the Tribunal. Moreover, for assessment year AY 2001-02 the reopening was after four years from the end of Assessment year and there is no failure on the part of the assessee to disclose fully and truly all material facts, therefore the reopening is bad in law. For assessment year 2003-04, since the issue was already decided in the original assessment, it was contended that there was only a change of opinion, which cannot be a basis for reopening of the assessment. The Assessing Officer, however, rejected the contentions and made reassessment invoking the provisions of section 80IA(10) and re-determined the profit eligible for deduction u/s 80IA.
4. Aggrieved, the assessee contested the issue before the CIT (A) not only on merits but also on issue of reopening of assessment. The CIT (A) in his order for AY 2001-02 against the re-assessment order has upheld the claim of the company that re-assessment was bad in law on following grounds:-
i. The assessment was reopened beyond 4 years from the end of the assessment year and that there is no failure to furnish or disclose fully and truly all material facts.
ii. Second proviso to section 147 permits the Assessing Officer to reopen the assessment in a case other than income involving matters which are subject matter of an appeal, revision etc and that the issue of determining profit of Dahanu Unit for the purpose of deduction u/s 80IA was a subject matter of appeal before Tribunal.
iii. The notice u/s 148 was issued following the objection raised by Audit and that audit the objection was not accepted by the Assessing Officer stating that the income was assessed in correct manner. This view was also confirmed by CIT.
iv. The action of the Assessing Officer has involved a change of opinion. In the re-assessment the Assessing Officer has relied upon section 80IA(10) whereas in the original assessment the Assessing Officer had applied section 80IA(8). Further the Assessing Officer has estimated the profit on 16% on capital as against the method adopted in the original assessment which was the market price of the power supplied by the third unrelated party. Thus there was change of opinion.
5. Coming to AY 2003-04, this is a case of reopening within four years from the end of the assessment year. Facts are same except that the assessee company had accepted the Assessing Officer’s method of working in AY 2000-01 of adopting price paid to TPC as the market value of electricity generated at Dahanu and transferred to distribution business. However, the computation of profit of Dahanu Unit continued to be a subject matter of appeal as the issue relating to disputed standby charges in the computation of profit of Dahanu Unit and also the issue of allocation of head office expenses were decided by Tribunal. CIT (A) followed his own order for AY 2001-02. The CIT (A) also has stated that the Assessing Officer has reopened the assessment applying section 80IA(10) which is applicable to transactions between two persons. He accordingly cancelled the reassessment proceedings for this Assessment Year also.
6. The revenue is aggrieved on the cancellation of notices u/s 148 by the CIT (A) whereas, the assessee is aggrieved that the issue was not considered on merits as well. Accordingly, there are cross appeals in these two assessment years.
7. Initiating the discussion, the Learned Departmental Representative reiterated the facts and submitted that the assessment for AY 2001-02 was reopened after end of 4 years but there were reasons to believe on the facts that the assessee has not informed about the applicability of Electricity Act and the notifications and the orders of the MERC were also not on record, according to which the assessee was entitled only for reasonable return of 16% on the capital employed and, therefore, there are reasons to believe that income has escaped assessment as there was failure on the part of assessee to disclose the facts. It was further submitted that the issue of quantum of profits was not subject matter of original assessment. The issue of pricing of power generated was issue determined by the Assessing Officer in the original assessment whereas in the reassessment issue was of quantum of profits allocated to the eligible unit, which are entirely different. The Departmental
Representative relied on the judgment of the Allahabad High Court in the case of M/s Ema India Ltd vs ACIT Central Circle I in Civil Miscellaneous Writ Petition No 181 (Tax) of 2004 dated 16.9.2009 and particularly Para 35, which is as under:-
“The assessee does not discharge his duty by merely producing the books of account or other evidence. He has to further bring to the notice of the Assessing Officer particular items in the books of account or portions of document which are relevant. Even if it is assumed that, from the books produced, the Assessing Officer could have found out the truth, he is not on that account precluded from exercising the power to re-assess the escaped income (See. Kantamani Venkata Narayana & Sons vs Addl ITO 1967 63 ITR 638 (SC); Sowdagar Ahmed Khan vs ITO (1968) 70 ITR 79 (SC); ITO vs Lakhmani Mewal Das, (1976) 103 ITR 437, 445, 445 (SC).” 7.2 He admitted that this judgment was given in the context of a case pertained to reopening within four years but the principles will equally apply. He also submitted that for the assessment year 2003-04, the facts are similar except that the reassessment in this case was done within 4 years and parameters for considering the issue in this year are slightly different from that of AY 2001-02.
8 The Learned Counsel for the assessee made elaborate arguments, referred to various documents placed in four volumes of paper book, and provisions of the Act and the orders in assessee case by the AO ,CIT(A) and Tribunal in various years. Briefly stated, his first proposition was that Assessing Officer has no reason to believe that income chargeable to tax has escaped assessment. The main contention is that the provisions of section 80IA(10), which was held to be applicable to the assessee are not at all applicable to the assessee. He referred to the provisions of section 80IA(10), more particularly to the wording of the provisions itself “where it appears to the Assessing Officer 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 was so arranged……….”. It was his submission that this provision can be invoked only when there were transactions with “any other person”. In the assessee’s case, it was submitted that transactions were not between the two different organisations but is a case of transfer of goods from eligible business to other non-eligible business with in the organisation. The Assessing Officer, has originally invoked the provisions of subsection (8) as that provision was applicable. Accordingly, his submission that reference to section 80IA(10) in the reasons recorded itself was not correct and so `reason to believe’ by the Assessing Officer does not exist.
8.2 Next proposition made by the Learned Counsel for the assessee is with reference to failure to disclose fully and truly all material facts. It was his submission that the assessee has disclosed all material facts. Notification No. S 0152E dated 30th March’92 issued under Electricity Act, 1948 by the Maharashtra Government was published in the official gazette and, therefore, this notification is available to the public at large. Accordingly, relying on the judgment of Hon’ble P & H High court in the case of N S Ludhania vs state OF Punjab (2009) NTN (Volume 40) 342 it was his submission that there is no need for the assessee to specifically bring to the Assessing Officer’s knowledge about notification published in the official gazette, way back in 1992 and assessment of subsequent years have been completed earlier also. Even otherwise, the notification dated 20th March’92 provides that parameters of calculating tariff while distributing the electricity, which has nothing to do with the calculation of profits of Dahanu Unit on generation of electricity. Therefore, the notification, was even otherwise not applicable for computing the profits of the generation unit. As regards the MERC order, the same was issued on 1.7.2004, whereas, the original assessment order was passed on 23.3.2004. The assessee cannot be expected to disclose the facts, which are not in existence, even by the time the assessment order was passed, leave alone at the time of filing the return. On this proposition, the Learned Counsel relied on the judgments in Grindwell Norton Ltd v ACIT 267 ITR 673 (Bom) & Bhagwati Sahakari Sakar Karkhana Ltd v DCIT 269 ITR 186 (Bom). It was his submission that the assessee cannot disclose facts, which are not in its knowledge and that cannot be a reason for reopening the assessment.
8.3 Continuing the arguments, the Learned Counsel also made a proposition that the reasons to believe has to exist both at the time of reopening as well as at the time of making the reassessment. Referring to section 152(2), it was his submission that the Assessing Officer should have dropped the proceedings in case he has no reason to believe or at least when the assessee explains that no income has escaped the assessment. Consequently, the reasons to believe that income has escaped the assessment must exist at the time of completion of reassessment. Referring to the replies given by the Assessing Officer and by the CIT to the audit, placed in the paper book at page 445 to page 455, it was his submission that, since Assessing Officer as well as CIT has not accepted the audit objection, it cannot be stated that they have reasons to believe at the stage of completion of reassessment proceedings. On this proposition alone, the assessment proceedings are bad in law.
8.4 Another contention raised by the Learned Counsel is that the, second proviso to section 147 prevents the Assessing Officer from reopening the assessment in respect of matters, which are subject matter of appeal. It was his submission that the subject matter of appeal in the original assessment was determination of market value of Electricity transferred from Dahanu Unit to distribution network and arriving at the profit on generation by the eligible unit for the purpose of deduction u/s 80IA. The Assessing Officer has determined the market value on the basis of purchase price of Tata Power Corporation (TPC) in determining the sale price of the generated unit. The only issue contested is also with reference to the sale price on the standby charges paid to TPC. By the time the orders was considered by the ITAT in AY 2000-01, the assessee and TPC has settled the issue of standby charges and accordingly the Tribunal has directed the AO to work-out average price paid to TPC while computing the profit of generation unit at Dahanu Unit. It was his submission that the issue before ITAT was nothing but determination of profit on generation of electricity by the Dahanu Unit and Assessing Officer has correctly invoked section 80IA(8) in the original assessment, which was subject matter of appeal and so reopening on the basis of non-applicable of section 80IA(10) was not only bad in law but also prohibited by the second proviso to section 147. He relied on the decision of the CIT vs Nirma Chemicals Works Pvt Ltd 309 ITR 67 (Guj) and decision of the ITAT in the case of Sujata Grover v DCIT 74 TTJ 347 and Marico Industries Ltd vs ACIT 115 TTJ (Mum) 497. The latter two decisions are given in the context of section 263 but the principles are equally applicable.
8.5 The Learned Counsel further submitted that the reassessment is nothing but change of opinion. Referring to the arguments made earlier, it was his submission that the Assessing Officer himself has invoked section 80IA(8) and worked out the profits of the Dahanu Unit by adopting the price paid to Tata Power Companies for purchase of electricity. This view was confirmed by the CIT (A) in AY 2000-01 and also accepted by the assessee in the later years on the basis of which the Assessing Officer has recomputed the profits. Adoption of a different method now on the basis of audit objection is nothing but change of opinion. For this proposition he relied on the decision of the Hon’ble Supreme Court in the case of CIT vs Kelvinator of India Ltd 320 ITR 561 (SC) and also Bombay High Court judgments in the case of German Remedies Ltd vs DCIT 285 ITR 26 (Bom), Siemens Information System Ltd vs ACIT 295 ITR 333 (Bom) and Asian Paints Ltd vs DCIT 308 ITR 195 (Bom). It was his submission that the Assessing Officer has changed his opinion about the working of profits and so the orders of the CIT (A) on this issue are to be upheld.
8.6 In his submissions, the Learned Counsel also argued how the provisions of section 80IA(10) are not applicable to the assessee’s case on merits and referred to the tariff order in explaining how tariff was fixed for the consumer by the MERC and why the submissions made therein cannot be the basis for determining the profits of the assessee. He also referred to the various workings given by the assessee to the MERC for fixation of tariff and explained the intricacies about the fixing of tariffs to the consumers depending on the nature domestic/ industrial consumers and various tariff rates for various class of people, which has no basis for determining the profits of generation unit. The tariff rates are applicable for distribution of electricity and while arriving at the tariff, they have various parameters including 16% reasonable return on capital investment. This is only one of the consideration in fixing the tariffbut MERC also takes into consideration the actual profits earned so for and possible profits in future and various other considerations/ parameters in determining the tariffs, which has no relevance at all in arriving at the profits of the generation unit. He also made reference to the audit objection, replies to the audit objection, placed in the paper book to submit that reopening pursuant to audit objection is invalid and referred to the Hon’ble Bombay High Court judgement in IL & FS Investment Managers vs ITO 298 ITR 32 (Bom) wherein the Hon’ble Bombay High Court has cancelled the reassessment where audit objections were not accepted by the Assessing Officer but proceedings were initiated. It was his submission that similar facts exist in the assessee’s case. He also referred to the cross appeals by the assessee on merits holding that the Assessing Officer order in determining the profits of the Dahanu Unit is not according to the provisions of the Act and the facts. He supported the orders of the CIT (A) who cancelled the reassessment proceedings. He also submitted that assessee’s cross appeals does not require adjudication specifically as the issue was to be decided in the revenue appeals wherein merits of the assessment order was also to be discussed elaborately and relied on facts explained in the course of submissions. The Learned Counsel also submitted the following chart referring to the orders in various assessment orders placed in the paper book:-
Assessing Officer’s order
Page No of
Page No of
Page No of
combined paperbook J
25 to 33
12 to 12.11
25 to 33
29 to 32
9 to 9.1
63 to 66
21 to 27
16 to 16.5
87 to 94
20 to 22
14 to 14.3
23 to 24
157 & 158
4 to 7
8 to 9.1
189 to 192
19 to 21
11 to 11.4
236 to 238
11 to 14
9 to 9.3.3
257 to 260
326 & 363
32 to 36
11 to 11.4
306 to 310
9 to 9.3.3
9. We have considered rival contentions and examined the record. In order to appreciate the issue, it is necessary to reproduce the reasons for reopening the assessment, as recorded by the Assessing Officer for assessment year 2001-02. Similar reasons were also recorded for AY 2003-04. Reasons recorded for AY 2001- 02 are as under:-
In this case, the assessee has filed the return of income for AY 2001-02 on 31.10.2001 declaring total income at Nil and taxable income u/s 115JB at Rs 3,41,86,93,066/-. The assessment order u/s 143(3) of the act has been passed on 23.03.2004 assessing the total income under normal provisions of the Act at Rs 38,31,48,980 and u/s 115JB of the Act at Rs 3,41,95,51,266. In the same assessment order, the assessee has been allowed the deduction u/s 80IA of the Act at Rs 1,46,72,642 (in respect of profit from Elastimold business) and also at Rs 3,14,31,23,593 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 therefrom. 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 30.3.1992 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 per cent 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 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. Tough 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: Rs in crs Reasonable profit allowed by MERC while calculating Tariff 230 Net power transferred from generated unit 3231 Total sales in license area 5415
Prorate Reasonable profit 137.23
80IA deduction computed 480.41
80IA availed after restricting to available total income 314.31 Excess 80IA deduction availed 177.08
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 177.08 crores has escaped the assessment for AY 2001-02. This escapement of income is by reason of the failure on the part of the assessee to disclose fully and truly all material fact necessary for the assessment for the assessment year 2001-02 Issue notice u/s 148 of the Act.”
10. As can be seen from the above, the Assessing Officer’s reason to believe arises from the interpretation of section 80IA(10) and further the determination of profits as reasonable rate of return on capital on the basis of Electricity Act 1948 and MERC order which admittedly was issued after completion of assessment order. These issues are dealt with as under
10.1 Issue of applicability of section 80IA(10) The provision of section 80IA(10) relied upon by the Assessing Officer is as under:-
“10. Where it appears to the Assessing Officer 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 produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer 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.”
10.1.2 As can be seen from the provision, the Assessing Officer can only invoke this provision only when there is a close connection between the assessee carrying on the eligible business and any other person or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits. This sub-section postulates that there should be close connection between the assessee and any other person. In this case, the assessee is generating and also transmitting in its business only. There are no transactions with any other person. As submitted by the Learned Counsel, section 80IA(10) has no relevance to the assessee’s business transactions in generation and transmission of power. Accordingly, we are of the view that invoking the provisions of section 80IA(10) does not arise in this case. As already stated elsewhere in the facts of the case, the Assessing Officer originally has invoked section 80IA(8) which is the correct provision applicable to the transactions of the assessee. Section 80IA(8) is as under:
“8.Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date :
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.”
10.1.3 In view of the clear provisions of section 80IA(8) applicable to the assessee’s business, where there are transactions between eligible business and any other business carried on by the assessee (generally called non-eligible business), the Assessing Officer has to determine the market value of goods and services in arriving at the profits. This aspect was taken care by the Assessing Officer at the time of original assessment from AY 2000-01 and onwards and so the Assessing Officer’s opinion in invoking the provisions of 80IA(10) is not according to the law and facts.
10.2 Tariff determined in the MERC Order Another reason for reopening is the order for determination of tariff for sale of power issued by the Maharashtra Regulatory Commission for financial 2004-05 in assessee case of 18 of 2003, dated 1.7.2004. As admitted by the Assessing Officer himself in the reasons recorded, this order was not available at the time of completion of original assessment, therefore, the assessee cannot be considered to have not disclosed full facts when the said order itself was not available and even the proceedings have not been initiated for any of the assessment years under consideration. As can be seen from the order of the MERC, the order itself indicates that it is in a matter of “approval of M/s BSES Ltd) (Now a Reliance Energy Ltd)’s annual revenue requirements for financial year 2003-04 and 2004-05 and determination of tariff for FY 2004-05”. The issue before the MERC under the Electricity Act, 2003 vide powers vested in section 61 & 62 in the MERC was for determination of the tariff for supply of electricity to various categories of consumers.
In its detailed order, the MERC has taken into consideration various factors, objections and also the details, particularly, the statements submitted by the BSES, objections from the general public and ultimately made various adjustments towards capital cost, fuel adjustment, revenue projections, requirement of funds in next few years, past profits of the company in the detailed order. The first part of the order consist of brief history of tariff determination, second part contains various objections raised and the issues and the findings on the issues and third part comprises commissions analysis and its decisions on BSES submissions, ARR and tariff objections for FY 2003-04 and 2004-05 and commission’s reasoning in arriving at acceptable figures with reference to the figures furnished by BSES. The last part contains the determination of tariff for various categories in financial year 2004-05. This indicates that entire exercise of the regulatory commission was with reference to determining annual revenue requirement and fixing the tariff for supply of electricity to various consumers groups. As per the provisions of the Electricity Act, as modified by the various provisions of State Act, the MERC has, for the first time issued a tariff order on 1st July 2004 which is applicable for financial year 2004-05. In determining the tariff, there are various parameters to be considered and in that one such parameter is the reasonable rate of return at 16% of the capital cost. However, there are various methodologies in arriving at various workings for determining the tariff and this is based on the provisions of the Act, various instructions and findings of the commission. As per the MOP Notifications investments made after 31.3.1999 are eligible for reasonable return of 16%. licencees were also entitled for 0.5% return on loans from approved institutions and on the investment allowances reserve. Further it indicates that on account of commission’s philosophy in reducing the reserves to match the shortfall in clear profit on yearly basis stated capital base was higher than the capital base projected by the BSES. Accordingly, the restated level of reasonable returns for the period FY 2002-03 to financial year 2004-05 has been given in detail in page 117 of the order. As seen from the order and the table, there are various rates of return for investments made by the assessee company from capital base on 31st March 1965 to 1st April 1999 and at various percentages of reasonable return. The probable reasonable returns were estimated by the MERC.
The projections also indicate that the assessee submitted that the reasonable return at Rs 337.37 crores whereas MERC arrived at 256.66 crores. Likewise, clear profits were discussed in para 21 and at the end of the discussion, the commission has left this note “Thus, the revised net surplus between clear profit and the reasonable return in financial year 2004-05 based on the existing tariff and the commission’s projections of expenses works out to 309.4 crores, which was adjusted by the revising tariff to different categories based on the commission’s tariff philosophy discussed in the next section”.
10.2.2. All this indicates that under the Electricity Act, MERC is empowered to determine the tariff at which the assessee can supply the electricity to the consumers and in doing so, the MERC was given various guidelines including considering the rate of return at 16%. The entire exercise, as can be seen is only to determine the tariff, at which the electricity can be supplied, but that does not mean that assessee cannot earn more profit than that. In fact, the commission also acknowledges that the actual profits are more than clear profits determined and the surplus was adjusted to the reserves for future adjustments in tariffs. The entire order is for fixing the tariff only and nowhere there is any restriction that the assessee cannot earn more than the reasonable rate of return that was projected, by efficient plant load factor, decrease in transmission losses, benefits in interest savings and fuel costs etc, which have been projected at a fixed rate in the Electricity Act under various guidelines and notifications and Schedules. Since exercise of MERC is only for fixing the tariff, that too applicable from financial year 2004-05, we are not in a position to understand how the order of MERC issued for fixation of tariff from financial year 2004-05 has any relevance in arriving at the profits of the generation unit determined already by the Assessing Officer under the provisions of the Act. There is no co-relation with the reasonable rate of return considered for tariff fixation under the Electricity Supply Act and the actual profits earned by the assessee company and the profits as determined by the Assessing Officer under the provisions of section 80IA(10). In fact, in the original assessment order, the assessee’s claim of profit is on the actual average sale price to the customers, which was higher than what was as determined while basing the sale price on the power purchased from Tata Power Companies. Since the Assessing Officer has originally exercised the correct provisions of the Act in determining the profit of the eligible unit, the present Assessing Officer’s exercise in re-determining the profit on the basis of the Tariff Fixation Order r. w. Electricity Supply Act has no basis at all. Accordingly, we are of the view that reference by the Assessing Officer to MERC’s order and invoking provisions of section 147 for reassessment is not correct and has no basis at all.
10.3 Failure to furnish fully and truly all material facts For the assessment year 2001-02, the assessment was reopened after 4 years from the end of the assessment year. As per the first proviso to section 147, the Assessing Officer cannot reopen the assessment unless there is failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. As rightly submitted by the Learned Counsel, the Electricity Act 1948 and its notification issued way back in 1992 are in the public domain and there is no need to specifically furnish them to the Assessing Officer. Moreover, the assessee is also assessed from so many years and is in the business of supply of transmission of electricity initially and power generation and transmission in the recent past and it cannot be stated that the Act, notifications, which are in public domain cannot be considered as non-disclosure of material facts necessary for his assessment. Even the MERC order relied upon by the Assessing Officer was not even in the knowledge of the assessee as they have for the first time approached the MERC in year 2003 only and the order was passed, after obtaining public objections and after examination of facts on 1.7.2004. Relying on various principle established in the case laws stated in the arguments above on this proposition, we are of the opinion that there is no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment and consequently the reopening after the end of 4 years from the assessment year is bad in law.
10.3.2 Further the order of MERC can not be a basis for reopening. In the case of Coca-Cola Export Corporation vs ITO & another 231 ITR 200 The Hon’ble Supreme Court has considered similar facts where the letters were issued by the Government of India relating to remittance of foreign exchange under the provisions of Foreign Exchange Regulation Act and on the basis of those letters the assessments in the above said wholly owned subsidiary of Coca-Cola Corporation was reopened for disallowing the foreign exchange loss arose to the said assessee. On these facts, it is held as under:
“..allowing the appeals, that the two letters in question were issued under the provisions of the Foreign Exchange Regulation Act and dealt with remittance of foreign exchange outside India. Any contravention of these letters would entail prosecution under section 56 of the Foreign Exchange Regulation Act, 1973, and under section 23 of the Foreign Exchange Regulation Act, 1947. The embargo so placed by these two letters on the foreign remittance to be made abroad by the appellant had nothing to do with the amount of disallowances under the Income-tax Act. If any remittance of foreign exchange had been made in excess of the prescribed limit from January 1, 1969, it was for the Reserve Bank or the Central Government to take action or to grant permission as may be provided under the Foreign Exchange Regulation Act, 1973. That, however, could not be a ground for the Income-tax Officer to assume jurisdiction to start reassessment proceedings either under section 147(a) or section 147(b) of the Act on the ground that that it would be “in consequence of information” in his possession in the shape of these two letters. Both the Acts-the Income-tax Act and the Foreign Exchange Regulation Act-operate in different fields. The two letters were wholly irrelevant and could not be treated as information to the Income-tax Officer to initiate reassessment proceedings. Therefore, there was inherent lack of jurisdiction in the Income-tax Officer to issue notices under section 148 of the Act on the basis of any income of the appellant escaping assessment either under clause (a) or clause (b) of section 147 of the Act. All the notices under section 148 of the Act were liable to be quashed.”
In this case also we are of the opinion that the MERC order given subsequently for fixation of tariff on the basis of Electricity Supply Act and its Notifications operate in different field and has no bearing for determination of profits under the IT Act.
10.4 Merger of the Order It was also one of the contention that the issue of quantification of deduction under section 80IA in respect of the Dahanu plant by the Assessing Officer, in the original assessment order has merged with the orders of the CIT (A) and ITAT and, therefore, the re-computation thereof by adopting a different method of working of profit eligible for deduction u/s 80IA was beyond the powers of the Assessing Officer. The Learned Departmental Representative vehemently argued that the issue in original assessment was entirely different. We are not in a position to accept the contention. The issue in original assessment was determination of profit for the purpose of deduction u/s 80IA on the Dahanu Generation Plant. The claim of profit, as determined by the assessee on the basis of average sale price to the customers was not accepted and the Assessing Officer re-determined that profit by invoking the provisions of section 80IA(8) and determined on the basis of average purchase price from Tata Power Companies. The ITAT order in the AY 2000-01 indicates that the issue in appeal was a quantum of profit generated by the Dahanu Unit. Since this quantum of profit is being re-determined at 16% on the basis of reasonable return considered while fixation of tariff by the MERC, we are of the opinion that, the issue being similar, the orders of the AO merged with that of ITAT and accordingly the Assessing Officer looses his jurisdiction to reopen the assessment as second proviso to section 147 is clearly applicable. Since the issue of profit for deduction under section 80IA, having been made subject matter of appeal before the CIT (A) and the ITAT, the said issue of determination of profit for the purpose of 80IA(10) has merged with the order of the appellate authorities as a whole and hence, it was no longer amenable to the reassessment proceedings u/s 147 by virtue of second proviso to section 147. On this principles also, since in both the assessment years, the issue was originally considered and agitated at the level of the ITAT, the reopening on the same issue is to be considered as bad in law. We need not examine the various case law relied on this issue. Suffice to say that on facts and in law the issue having merged with the orders of ITAT was not amenable for reassessment. 10.5 Change of opinion
It is one of the contention of the assessee that Assessing Officer has changed his opinion in re-determining the profits. As discussed earlier, the Assessing Officer originally invoked section 80IA(8) in assessment year 2000-01 in re-determining profits and the same was followed in later years including the impugned years. now, again re-determining the profits under 80IA(10) which is not applicable to the assessee at all, can only be considered as change of opinion. Accordingly, it was argued that change of opinion cannot be a basis for reopening of the assessments. In this regard reliance was placed on the judgment of the Hon’ble Supreme Court in the case of Kelvinator India Ltd 320 ITR 561(SC). In the present case we find that there was an audit objection based on which the assessment proceedings were reopened. Though the Assessing Officer did not accept the audit objection later after initiation of reassessment proceedings, yet the fact remains that there was some material based on which he issued notice u/s.148 of the Act. In the decision of the Hon’ble Supreme Court in the case of Kelvinator India Ltd. (supra) it has been clarified that even after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. The following observations of the Hon’ble Supreme Court highlight this aspect. “We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre- condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.”
We are therefore unable to accept the argument of the learned counsel for the Assessee. Since the validity of initiation of reassessment has been held to be not valid on other grounds, we are of the view that this aspect will not make any difference to the ultimate conclusion in the case.
10.6 Basis Of Audit Objection Not Accepted The assessee also contended that reopening on the basis of audit objection, which was not accepted by the revenue authorities, was also bad in law. Reliance was placed on the decision in the case of IL & FS Investment Managers Ltd vs ITO 298 ITR 32 (Bom) wherein it was considered that the stand taken by the assessee was accepted by the revenue on merits and held that after disagreeing with the audit objection, reopening the assessment has no basis and so, was not valid. In this case however, the Assessing Officer issued notice u/s.147 on receipt of the audit objection and later on the Assessing Officer as well as the CIT did not accept the audit objection. They however proceeded to complete the reassessment. In such circumstances, we are doubtful as to whether it can be said that the audit objection was not accepted when the notice u/s.148 was issued. We therefore do not agree with this submission made on behalf of the Assessee.
10.7. Before concluding, we have to discuss another contention raised by the Learned Counsel in the arguments that the Assessing Officer should have reason to belief not only at the time of assessment but also at the time of completion of assessment. This argument can’t be accepted as the parameters for reopening on the basis of `Reason to believe’ has to examined only at the time of issue of notice u/s 147 r w s 148. In fact, the sufficiency of the material available with the Assessing Officer was called in question many a time, but there is consistent judicial opinion on this issue that sufficiency of material for `reason to believe’ that income has escaped assessment has to be examined at the time of initiation of the proceedings. Even though the Assessing Officer was empowered to drop proceedings, initiated u/s 147 by virtue of provisions of section 152(2), there is no restriction in concluding the proceedings, having been initiated validly. However, this issue becomes academic, as proceedings u/s 147 are held to be bad in law by virtue of first proviso to section 147 for assessment year 2001-02 and in both the years it involved merger of the orders of the higher authorities and second proviso to section 147 limits the jurisdiction of AO and also on the basis of change opinion, and other reasons as discussed in detail above. Accordingly, we are of the opinion that CIT (A)’s orders in cancelling the proceedings u/s 147 are to be upheld. The revenue’s grounds are accordingly dismissed.
11. The cross appeals by the assessee are with reference to the merits of redetermination of profits of the eligible business. Since we discussed the merits of the various issues while considering the revenue appeals, we are of the opinion that the Assessing Officer was not correct in invoking the provisions of section 80IA(10) as well as re-determining the profits on the basis of tariff order of MERC which was altogether for the different purpose. Even otherwise, quantum of determination of profits having been contested in appeal and got concluded in the original assessment proceedings, the re-determination by the Assessing Officer in reassessment proceedings is not correct. There is no need to consider the issue on merits again, since the reassessment proceedings are held to be bad in law, and so the issues raised in assessee’s appeal becomes the academic in nature and accordingly these appeals are also considered dismissed for statistical purposes.
12. In the result, the appeals by the Revenue and assessee are accordingly, dismissed.
Order pronounced on 14th day of May 2010.