By TIOL News Service

ERNAKULAM, NOV 25, 2017: THE ISSUE BEFORE THE COURT IS - Whether laying down a new network of transmission lines u/s 80IA(4) clause (b) and simultaneously renovating them u/s 80IA(4) clause (c), exposes a temporal impossibility and and cannot be satisfied by an undertaking cumulatively, for purposes of claiming benefit of such provision. NO is the verdict.

Facts of the case:

The Assessee is a private limited company, engaged in the business of "growing, manufacturing, and selling tea and other produce." It is also engaged in the business of distributing electricity taken from the State-owned Kerala State Electricity Board. The assessee’s predecessor, Tata Tea Limited, had not only owned the plantation business but also generated hydel power from the pre-independence days. Post-independence, when the State took over the power generation, the company was allowed to buy electric power from the Government in bulk, use it for its own purpose, and distribute the balance power to the residents of Munnar hill-station. So the predecessor company had an elaborate network of transmission lines. Formed in March, 2005, the assessee company took over the power distribution network as well as the tea plantations. For the A.Y 2008-09, the assessee filed its return declaring total income of Rs.2,45,83,170/-, which was subsequently revised to Rs.1,49,74,810/-. The assessee maintained that in 2007-08, it had renovated and modernised the transmission lines by investing huge amounts. So for the A.Y 2008-09, it claimed tax benefits u/s 80-IA. Among other items, the AO disallowed the deduction. As on April 01, 2004, the assessee’s plant and machinery were valued at Rs.88,39,340/-. In the F.Y 2007-08, the assessee invested Rs.50,30,952/-. Because of this investment, the assessee asserted that the transmission network had been renovated and modernised. Accordingly, it also justified its claim for tax deductions u/s 80-IA. The Revenue frontally attacked the assessee’s claim for deduction on two grounds, namely; (1) the machinery on the plant existing before the alleged renovation or modernisation was used by the assessee’s predecessor; (2) the conditions u/s 80-IA were cumulative, but the assessee had failed to prove that it had fulfilled all those conditions.

High Court held that,

++ it is to be noted that Section 80-IA is the beneficial provision, carving out an exception from the rigors of tax payment. An assessee can deduct his total profits for ten consecutive assessment years if it earns those profits from any of those businesses enumerated under sub-Section (4) of the provision. Indeed, the deduction is subject to certain limitations. Undoubtedly, the assessee's business is covered by Section 80-IA(4). An enterprise may (i) develop, or (ii) operate and maintain, or (iii) develop, operate, and maintain any infrastructural facility. It brooks no contradiction if we hold that all these three activities are disjoint. Now, clause (iv) of Section 80IA(4) mandates that an undertaking in India may (a) generate or generate and distribute power at any time between 1.4.1993 and 31.3.2010; (b) transmit and distribute by laying a network of new transmission or distribution lines between the above-mentioned period; or (c) substantially renovate or modernize the existing network of transmission or distribution lines between the same period. The Revenue, indeed, has contended that these three contingencies are cumulative. However, it is not correct. The clauses (a), (b), and (c) are disjointed and, in fact, unconnected. Clauses (b) and (c), especially, cannot go together. Under clause (b) a network of new transmission or distribution lines must be laid, whereas under clause (c), they must be renovated or modernized. Laying down a new network of transmission lines under clause (b) and simultaneously renovating them under clause (c) exposes a temporal impossibility and linguistic incongruity;

++ first, temporally, we can only renovate what has already been in use; second, linguistically, we cannot renovate what is new. So legislative intent is unmistakable, and the conditions are disjoint and independent. The assessee’s fulfilling any one of them will suffice. And the assessee here did fulfil clause (c). Now, whether the conditions under sub-Section (4)(i) are cumulative or not, should also be examined. Clause (a) mandates that the company must have been registered in India under any Central or State Act. It should contract with the Central Government, or State Government, or any other statutory authority to develop, or operate and maintain or, develop, operate and maintain a new infrastructure facility. Under clause (c), the operating and maintaining infrastructure facility must have commenced after the 1st April, 1995. It is not disputed that all these three activities are cumulative and the assessee fulfils them all. Has the Machinery Been Used. Indeed, the counsel for Revenue has emphasized that much of the machinery in the assessee's establishment has already been used by another establishment. Section 80IA, evidently, applies to an "undertaking" referred to in clause (ii) or clause (iv) or clause (vi) of sub-section (4) if it fulfils the enumerated conditions. We have already held that the assessee’s undertaking falls in clause (iv) of sub-section (4). As per the conditions stipulated, the assessee ought not to have formed the undertaking by splitting up or reconstructing an existing business. Here there is neither splitting up nor reconstructing; nor is it the Revenue’s case, either. Equally mandatory is the other condition that the assessee has not formed the undertaking (ii) by transferring to a new business any machinery or plant used earlier for any purpose. The Revenue, true, latches on to it;

++ of course, the restriction under clause (ii) will not apply to the machinery or plant used abroad by any other person than the assessee, as stated in the Explanation I. But it does not apply to this case; nor does the Explanation 2, which permits an assessee’s new business to use less than 20% of the used machinery. It is well to remember that deduction u/s 80-IA was introduced only through Finance (No.2) Act, 2004; the Act spells out that it is to encourage investment in existing undertakings. CBDT Circular No. 5 of 2005, dated 15th July, 2005, also clarifies the legislative intention behind it. From perusal of such circular, we can gather that Section 80-IA has a salutatory purpose of encouraging investment in renovation and modernization of the transmission and distribution network. We must acknowledge that the deduction u/s 80-IA is a profit-linked incentive, for the very Chapter VI-A provides for the incentives of tax deductions. The 1961 Act broadly provides for two types of tax incentives: (a) investment linked incentives; (b) profit linked incentives. So, according to the Supreme Court in Liberty India v. CIT - 2009-TIOL-100-SC-IT when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What merits the incentives u/s 80-IA/80-IB is the generation of profits. Further, if we look at the scheme of Section 80-IA(2), it does not speak about the business of assessee but of "undertaking" or "enterprise". Then, an undertaking or an enterprise alone matters for the Revenue to decide the eligibility;

++ significantly, section 80-IA (2), the charging provision, does not refer to "business" as such. Repetitive it may be, the assessee acquired in March, 2005 certain tea estates at Munnar, as a going concern. This acquisition included the erstwhile "Devikulam Estate" from Tata Tea Limited. The plant and machinery thus acquired included the electric power distribution network-the transmission lines. The assessee produced an audited certificate that the written down value of the plant and machinery as on 01/04/2004 was Rs. 88,39,340/-. It has claimed that it spent for the A.Y 2008-09 Rs.50.31 Lakh to renovate and modernize its transmission network. So, the amount spent is over 50% of the then existing establishment's book value. Indeed, the undertaking squarely falls u/s 80-1A(4)(iv)(c). The renovation or modernization, admittedly, took place between 01.04.2004 and 31.03.2011. To be specific, the assessee claims that the undertaking’s renovation or modernization has brought about "substantial improvement in the 'line loss.' Substantial renovation and modernization has been done by replacement of High Tension distribution lines and installation of new CT/PT units." In such circumstances, the AO's disallowing Rs.58,91,000/- u/s 80-IA, as affirmed by the ITAT.

(See 2017-TIOL-2467-HC-KERALA-IT)