Income Tax Act | Interest Earned From Bonds Towards Late Payment Of Energy Bills Can Be Deducted As 'Power Profit' U/S 80-IA(4)(iv): Orissa High Court

"The Court, therefore, has no difficulty in accepting the submission of the Assessee that the interest received on advances and loans given to its employees are receipts in normal course of carrying its business and should be considered as income derived from its essential business activities. Likewise, the late payment by GRIDCO for the electricity supplied, is sought to be made up by GRIDCO by issuing bonds on which the Assessee earns interest. This also therefore, has a direct nexus with the essential business activity of the Assessee."

Factual Background:

The Assessee (appellant herein) is a Government of Odisha enterprise solely engaged in the business of generation of power. The power generated by the Assessee's plants is sold exclusively to the Grid Corporation of Odisha Limited (GRIDCO) under a Power Purchase Agreement (PPA). In terms of the said agreement, the Assessee is obliged to sell the entire power produced only to GRIDCO and cannot sell the power to any other entity or agency.

For the Assessment Years (AY) 2002-03 and 2003-04, the sum shown under 'other income' was not allowed to be claimed towards deduction under Section 80-IA of the Act. As far as AY 2002-03 is concerned, a sum of Rs. 24,97,18,456/- was claimed under the head "other income" and for AY 2003-04, a sum of Rs. 21,77,36,307/- was claimed. The said figures included the sum towards interest on the bonds issued by GRIDCO to the Assessee in lieu of unpaid energy bills. In other words, this was the interest received for delayed payment of the power bills by GRIDCO.

The ground on which the ITAT rejected the claim under Section 80-IA was that the Assessee had not been able to show "any nexus between the impugned interest received by it with interest payable". Holding that the issue was covered by the decision of the Supreme Court in Pandian Chemicals Ltd. v. Commissioner of Income Tax, (2003) 262 ITR 278 (SC) followed by the High Court in Tata Sponge v. CIT, 2007 292 ITR 175 Orissa, the ITAT held that a sum of Rs. 9 crores was earned by the Assessee from investment of funds in GRIDCO bonds and cannot be considered as income received for late payment of electricity. Accordingly, the deduction of the entire sum for the AY 2002-03 and AY 2003-04 was disallowed.

Contentions of the Appellant:

Mr. Satyajit Mohanty, counsel for the Assessee submitted that if the profits of business include certain receipts which have corresponding costs, or if the profits include certain credits and the business also has debits of the same nature, unless the same are netted out against each other, the profit of the business will present a distorted picture and may lead to injustice while implementing an incentive provision.

He vehemently argued that while computing profit of the business of industrial undertaking under Section 80IA of the Act, revenue receipts should be adjusted against revenue expenditure of the like nature. The revenue receipt in the form of interest on loans and advances given to the employees, receipts of rent and electricity charges, receipts from sale of scrapes, receipts derived from sale of surplus stock and sundry receipts etc. would reduce the revenue expenditure of other related expenditures. Therefore, the abovementioned receipts and related expenses are inextricably linked and is having direct and proximate connection/nexus with the Assessee's business of generation and distribution of power.

It was submitted that the amount shown under the head 'other income' is nothing but the outcome of the generation and distribution of power by the Assessee since the Assessee does not have any other source of business. Reliance was placed on the decision of the Supreme Court of India in Commissioner of Income Tax v. Meghalaya Steels Ltd.

Contentions of the Respondent:

Senior Standing Counsel Mr. T.K. Satapathy, appearing for the Income Tax Department contended that the critical words in Section 80-IA of the Act were that the other income must be derived from the business of generation of electricity and not merely 'attributable' to it. In other words, such income should have a direct and active nexus to the main activity.

It was contended that the income, profit or gain cannot be said to have been 'derived' from an activity merely because such activities may have helped the Assessee earn income or profit in an indirect manner. According to him, applying the test evolved in Pandian Chemicals Ltd. (supra), the AO, the CIT (A) and the ITAT were correct in disallowing the above sum as deduction under Section 80-IA of the IT Act under the head "other income".

Observations of the Court:

The Court observed, Section 80-IA(1) states that 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), which includes the business of power generation, there shall be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred percent of the profits and gains 'derived from' such business for ten consecutive assessment years.

It noted that this is almost similarly worded as Section 80IB and 80IC of the Act. These provisions use the expression 'profits and gains derived from any business'. The deduction of the entire profits and gains is allowed for a certain period of time to encourage the setting up of certain core or essential industries.

The Court acknowledged the motive behind the enactment of the said provision. The very object of enacting Section 80-IA was to encourage setting up of an industry involved in the generation and distribution of electricity or any other form of energy and the production, manufacture and construction of articles specified in the 5th Schedule to the Act. The idea was to provide incentives for promoting efficiency in the industry.

It further noted that the Assessee had no other source of income except through generation and sale of power. All its receipts and expenditure relate to a single activity of power generation. There is no dispute that it is an industrial undertaking covered under Section 80 IA of the Act and that its net profit is otherwise eligible for deduction under Section 80-IA of the Act.

Consequently, the Court relied upon the decision of the Apex Court in CIT v. Meghalaya Steels Ltd. (supra) and held,

"Extending the same analogy and reasoning to the interpretation of Section 80-IA, this Court is satisfied that on the netting principle, since there is no other activity of the Assessee except power generation, the AO, the CIT(A) and the ITAT, were in error in disallowing the aforementioned sum as deduction under 80-IA of the IT Act. There is merit in the contention of the Assessee that the interest received from the bonds issued by GRIDCO have a direct nexus with its essential business activity and therefore, was income derived from it, thus, making it eligible for such deduction."

Case Title: Odisha Power Generation Corporation Ltd. v. Asst. Commissioner of Income Tax, Circle 2(2), Bhubaneswar & Ors.

Case No.: ITA No. 1 of 2015

Date of Judgment: 11 March 2022

Coram: Chief Justice Dr. S. Muralidhar and Justice R.K. Pattanaik

Authored by: Chief Justice Dr. S. Muralidhar

Counsel for the Appellant: Advocate Mr. Satyajit Mohanty

Counsel for the Respondent: Mr. T.K. Satapathy, Senior Standing Counsel (IT)

Citation: 2022 LiveLaw (Ori) 25