Commissioner of Income Tax-Xi v. M/S Dlf Commercial Project Corporation

order. Analysis and findings

¶14Before proceeding to deal with the rival merits of the contentions of the parties, it would be necessary extract some of the relevant CERC Regulations. On 26.03.2001, CERC Regulations of 2001 were brought into force with effect from 01.04.2001 for three years. Para 2.7 of these Regulations of 2001 reads as follows: "2.7 Payment of Capacity (Fixed) Charges

The Capacity Charges shall be computed on the following basis and its recovery shall be related to Availability.

(a) Interest on loan capital

Interest on loan capital shall be computed on the outstanding loans, duly taking into account the schedule of repayment, as per the financial package approved by the

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Authority or an appropriate independent agency, as the case may be.

(b) Depreciation:

(i) The value base for the purpose of depreciation shall be the historical cost of the asset.

Depreciation shall be calculated annually as per straight line method at the rate of depreciation as prescribed in the Schedule attached to this notification as Appendix-II.

Provided that the total depreciation during the life of the project shall not exceed 90% of the approved original cost. The approved original cost shall include additional capitalization on account of foreign exchange rate variation also.

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(c) Return on Equity: Return on equity shall be computed on the paid up and subscribed capital and shall be 16 percent of such capital. Explanation:- Premium raised by the Generating Company while issuing share capital and investment or internal resources created out of free reserve of the existing utility, if any, for the funding of the project, shall also be reckoned as paid up capital for the purpose of computing the return on equity, provided such premium amount and internal resources are actually utilized for meeting the

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capital expenditure of the generating station and forms part of the approved financial package as set out in the techno-economic clearance accorded by the Authority or approved by an appropriate independent agency, as the case may be.

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¶15On 30.04.2004, a notification was issued which stated that the terms and conditions for tariff determination with effect from

01.04.2004 were notified on 29.03.2004 to determination of tariff based upon revised terms was likely to take some time. The notification (of 30.04.2004), therefore, went on to direct as follows: "7/25(7)/2004-Legal

Dated the 30th April, 2004 NOTIFICATION XXXX XX

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¶2It is, therefore, directed that with effect from 1.4.2004, the billing of charges shall be done on the following basis, for a period of 6 months, that is, up to 30.9.2004.

Thermal Power Generating Stations The annual fixed charges as applicable on

31.3.2004 shall be billed at the target availability and variable charges based on norms of operation notified on 29.3.2004. Hydro Power Generating Stations Full recovery of annual fixed (capacity) charges as applicable on 31.3.2004 shall be billed and recovered based on capacity index notified on

29.3.2004. Similarly, primary/secondary energy

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rates shall be computed based on the terms and conditions notified on 29.3.2004. Transmission System Annual transmission charges shall be billed as applicable on 31.3.2004 and recovered based on Target Availability notified on 29.3.2004.

¶3The development surcharge as applicable up to

31.3.2004 shall not be billed.

¶4The billing of charges as directed above shall be on provisional basis and shall be further subject to adjustment after final determination of tariff by the Commission in accordance with the revised terms and conditions notified on 29.3.2004, for which the petitions shall be filed by the utilities latest by 30.6.2004."

¶16Likewise, on 11.06.2004, a clarification was issued that since there were certain doubts with regard to payment of charges other than those specified in the notification of 30.04.2004, all respective terms of tariff of 29.04.2004 were applicable but that billing of charges of main component specified on 30.04.2004 would be regulated in terms of that notification only on provisional basis till determination of tariff in individual cases, was published. On

01.10.2004, the CERC notified as follows: "CENTRAL ELECTRICITY REGULATORY COMMISSION NEW DELHI L-7/25(7)/2004-Legal Dated the 1st October, 2004 NOTIFICATION It is hereby directed that the billing of charges in terms of the Commission's notification No.L-7/25(7)/2004-Legal dated 30.4.2004, read with the

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notification of even number dated 11.6.2004, shall be continued on provisional basis for a period up to

31.3.2005 or till disposal of the applications made by the utilities for approval of tariff, whichever is earlier, and shall be subject to adjustment after final determination of tariff by the Commission based on such applications.

¶2It is further directed that the applications shall be made by the utilities by 31.10.2004 failing which the Commission may consider to reduce the provisional tariff presently allowed for generating stations or the transmission assets, as the case may be, in respect of which the applications are not made by that date. (A.K. SACHAN) SECRETARY"

¶17The 26.03.2004 Regulations – notified on 29.03.2004 – which were referred to in the above two notification and which contained the terms that were operationalized after the tariff rates were fixed and finalized, by paragraph 21(iii) prescribed as follows: "(iii) Return on Equity Return on equity shall be computed on the equity base determined in accordance with regulation 20@14% per annum. Provided that equity invested in foreign currency shall be allowed a return up to the prescribed limit in the same currency and the payment on this account shall be made in Indian Rupees based on the exchange rate prevailing on the due date of billing. Explanation

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The premium raised by the generating company while issuing share capital and investment of internal resources created out of free reserve of the generating company, if any, for the funding of the project, shall also be reckoned as paid up capital for the purpose of computing return on equity, provided such premium amount and internal resources are actually utilized for meeting the capital expenditure of the generating station and forms part of the approved financial package."

¶18There is no dispute that Notes 3 (a) and 3(b) of the XXI Schedule to the Annual Report in this case disclosed all the facts, especially that initially the sales figures were ` 2683.01 crores; how there was a reduction in this on the basis of downward revision, due to the CERC Regulations, resulting in the final figure – shown in the return being ` 903.4 crores less. Therefore, NTPC could not be accused of withholding information or material information, or providing incomplete facts. The question therefore is whether the absence of a specific discussion on this aspect in the assessment order resulted in an error of law by the AO, and whether that resulted in prejudice to the revenue.

¶19The narrative and discussion of facts in the previous part of this judgment has showed that there was some tentativeness in the CERC Regulations about the tariff rates and conditions that were to be applied for the period 01-04-2004 onwards. The previous Tariff Regulations – framed in 2001 – were to end on 31.03.2004; yet by the latter date, even though the conditions for tariff applicability had been more or less finalized, the final tariff order, notifying the rates and some final principles, had not been brought into force. In

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these circumstances, the CERC directed that the existing conditions were to be applied till 30.9.2004. The notification of 01.04.2004 thereafter directed corporations like NTPC in the following terms: "… It is hereby directed that the billing of charges in terms of the Commission's notification No.L-7/25(7)/2004-Legal dated 30.4.2004, read with the notification of even number dated 11.6.2004, shall be continued on provisional basis for a period up to 31.3.2005 or till disposal of the applications made by the utilities for approval of tariff, whichever is earlier, and shall be subject to adjustment after final determination of tariff by the Commission based on such applications."

¶20NTPC thus had no choice in the matter but to carry on billing in terms of the previous notification on a provisional basis up to 31.03.2005 or till the approval of tariffs; such billing figures were to be subject to adjustment after final tariff determination. Thus, inherently there was a degree of uncertainty and incompleteness in the process. This was reflected in the return when the adjustment of the billing became necessary on account of the application of the CERC notification. NTPC's argument that the tariff for power plants from 2004-09 was lower than the tariff norms for 2000-04 has not been disputed by the Revenue. Even a bare look at the later Tariff Regulations shows that the rate of return was revised downwards. NTPC submits that it accounted sales for electricity for `2212.8 crores based upon the previous experience in tariff fixation orders of CERC. This was even though the billed amount was ` 2306.6 crores. This estimate was bona fide and made on a realistic assessment of sales estimation that could be

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realized in terms of accepted tariff notifications. There was nothing erroneous or prejudicial to Revenue's interest in such estimate.

¶21This Court finds that power generation companies owned or controlled by the Central Government are a sub-species of business entities for which a separate provision has been enacted by the Act. There is no dispute that the income of utilities, especially ones subject to stringent public control, are tightly regulated in terms of what are the accounting methods to be adopted, how depreciation is to be claimed, allowances rate of return on capital, etc. All these aspects are subject to CERC Regulations. At the relevant time, i.e. the transition between the old (2001) CERC Regulations, and the later ones (2004-2009), had not been fully worked out by the CERC as to what had to be recovered by NTPC and other entities. It therefore directed that the previous regime be followed. Apparently for a portion of previous accounting periods, provisional figures were being indicated as income estimates, and depending on how the final figures were worked out at times, higher figures would be offered as amounts received in excess of the sum estimated and reported during other periods. An example cited is one for 2006-2007 when an excess figure of over Rs. 46 crore was reported and brought to tax. Furthermore, the revision downward – in the present instance – was based on past experience, whenever revision of tariff had taken place. If downward revision were not undertaken, there would have been a

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likelihood of the higher figure not being realized after tariff finalization.

¶21There is authority, in the form of Supreme Court judgments in Shree Sajjan Mills Ltd v. CIT, (1985) 156 ITR 585, Bharat Earth Movers Ltd v. CIT, (2000) 245 ITR 428 and Metal Box Company of India Ltd v. Their Workmen, (1969) 73 ITR 53, that a provision made on a reasonable basis, it would be in the nature of an ascertained liability and that in a mercantile system of accounting, provision for liability ascertained during the course of the relevant accounting period, which is payable at a future is permissible.

¶22The expression "error of law" resulting in prejudice to the interests of the revenue are not to be given wide connotation, as is sought to be urged by the Revenue here. Where two views are possible, the Commissioner should not exercise his power under Section 263; Leisure Wear (supra) aptly summarizes this power as not enabling a revisional interdict on the mere existence of another view which conflicts with what was adopted by the Income Tax Officer; so long as the latter's opinion is a plausible one, exercise of power would be unwarranted. The fulfillment of both preconditions, i.e. error of law, and prejudice to revenue is essential, else the revenue would have wide ranging powers to oversee and re-open almost every assessment order. In the present case, the court is satisfied that the AO's order was made after appropriate inquiry; the absence of discussion regarding downward

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revision of sales figures in this case did not make it any less vulnerable to correction under Section 263. The view taken by him is one which is endorsed by law, as the CERC Regulations left the NTPC with little choice to make such revision awaiting a final determination in regard to the whole period after the expiry of the assessment in that instance.

¶23This Court is of the opinion that the question of law framed in this appeal has to be answered in favour of the assessee. The Commissioner acted erroneously in exercising revisional power under Section 263. The orders of the Commissioner and the ITAT are hereby set aside. The order of the AO dated 27.11.2006 is restored. However the merits of that order, on aspects other than what has been discussed here and pending in appeal, are not being touched upon. The appeal is allowed in the above terms.

S. RAVINDRA BHAT

(JUDGE)

R.V. EASWAR (JUDGE) APRIL 16, 2014

Page 1 * IN THE HIGH COURT OF DELHI AT NEW DELHI RESERVED ON: 13.03.2014 PRONOUNCED ON: 16.04.2014 + NTPC LTD. .….APPELLANT Through : Mr. S.E. Dastur, Sr. Advocate with Mr. R. Muralidhar and Mr. Ved Jain, Advocates. Versus COMMISSIONER OF INCOME TAX-V .…RESPONDENT Through : Mr. Rohit Madan, Mr. P. Roy Choudhary, Mr. Anshumaan Sahni & Mr. Akash Vajpai, Advocates. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.V. EASWAR MR. JUSTICE S.RAVINDRA BHAT 1. This is an assessee's appeal against the decision of the Income Tax Appellate Tribunal (ITAT) dated 30.4.2012 in ITA 1438/Del/2009 for the assessment year 2005-06. The question of law which arises for consideration in this case is whether the Commissioner of Income Tax fell into error in invoking his power under Section 263 of the Income Tax Act, 1961 ("the Act") modifying the assessment order by withdrawing the additional Page 2 depreciation of Rs.187,55,77,000 and further directing the Assessing Officer ("AO") to examine the allowance of Rs.938.80 crores on account of revision of sales afresh. 2. The assessee (hereafter called "NTPC") filed its return of income under the Act on 24.10.2005 and declared a total income of Rs.1330,17,92,000/. The return was processed under Section 143(1) on 27.2.2006 at the same figure. Later, the case was selected for scrutiny assessment and a notice under Section 143(2) of the Act was issued on 23.3.2006; the AO had served a detailed questionnaire upon NTPC under Section 142(1) of the Act. NTPC in response furnished the necessary details whenever called for by the AO. Upon analysis of various issues, the AO framed the assessment order under Section 143(3) on 27.11.2006. He determined the taxable income at Rs.3736,18,91,370/-. 3. The Commissioner, after going through the assessment order, felt that the AO allowed additional depreciation under Section 32(1)(iia) of the Act for the sum of Rs.187,55,71,000/30 due to additional assets at the Ramagundam and Talcher Super Power Plants, and that prima facie, this was not inadmissible. It was stated that there was lack of deliberation by the AO on the issue and, therefore, his order was erroneous as well as prejudicial to the revenue's interest. The Commissioner also noted that NTPC had raised the total sale bills to its customers of Rs.23066.03 crores in terms of the earlier norms of Central Electricity Regulatory Commission (CERC) and that the final order of CERC was not made during the year; it was to be passed in the succeeding year. Page 3 NTPC company had provisionally revised the sales downward. As on 31.3.2005, it reduced the sales provisionally to Rs.22128 crores on an estimate basis, without issuing any corresponding credit notes to its customers. In the opinion of the Commissioner, the AO permitted NTPC to reduce sales by Rs.938.03 crores without examining the issue, which rendered his order erroneous and prejudicial to the revenue's interest. 4. The Commissioner issued a show-cause notice under Section 263 of the Act, on 19.10.2007 seeking explanation of the assessee why the assessment order should not be treated as erroneous and prejudicial to the revenue's interest. The relevant portions of the notice are as follows: "(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(