Income tax - Whether Section 80IA benefits are available to captive electricity unit supplying power to assessee's manufacturing plant - YES: HC

CHENNAI, AUG 19, 2014: THE issue before the Bench is - Whether Section 80IA benefits are available to captive electricity unit supplying power to assessee's manufacturing plant. And the answer is YES.

Facts of the case

The assessee company was engaged in the business of manufacturing of fused Aluminium Oxide Grains, Calcined products, Monolithics, Refractories, Bonded Abrasives, Ceramic Paper and trading of Monolithic and Refractories. The assessee had an Abrasives Grains Division that manufactured fused Aluminium Oxide grains etc. The assessee had setup a power plant for captive supply to the Aluminium Oxide gains unit. Profit earned from the power plant unit was claimed as eligible for deduction under Section 80 IA as an undertaking engaged in generation of electricity. The assessee along with return of income, filed Form No.10CCB, computing deduction under Section 80 IA. In the course of the assessment proceedings, assessee filed a technical note explaining the features of the power plant established by them to generate electricity. The Assessing Officer denied benefit of Section 80 IA in respect of power plant unit. Assessing Officer was of the view that the power plant unit was supplying captive power to the assessee and third person or parties were not supplied power generated by the unit. Thus, assessee could not have earned profit as one cannot undertake or do business with oneself. Assessing Officer was also of the opinion that the profits declared as earned from the power plant unit were exorbitant and attempt had been made to enhance/increase the profits to claim higher exemption under Section 80-IA.

Having heard the parties, the Court held that,

++ Sub-section (1) states that benefit of Section 80 IA would be available when the gross total income of an assessee includes profits and gains derived by an undertaking or any enterprise from eligible business specified in sub-section (4). It is not disputed that generation of electricity was eligible business. The amount eligible for deduction under Section 80-IA, were profits and gains derived by an undertaking or any enterprise from the specified activity. Further, the profits so derived should form part of the total income of the assessee. Thus sub-section (1) draws a distinction between profits and gains of an eligible undertaking, which was engaged in the business of generation or distribution and gross total income of the assessee in whose income such profits were included. This distinction between an assessee and eligible profits of an undertaking of an assessee, becomes clear when we examine sub-section (5). Said sub-section stipulated that the assessee shall prepare separate profit and loss accounts for the eligible undertaking. The accounts of the eligible undertaking as a separate entity had to be audited and prescribed report in Form No.10CCB was mandated to be furnished, for ascertaining the qualifying profits. Form No.10CCB prescribed by Rule 18BBB at serial No. 4 stipulates and required an assessee to give ownership status of the undertaking/enterprise in a particular manner;

++ sub-section (8) stipulates (i) where goods and services held for the purpose of eligible business were transferred to any other business carried on by the assessee, or (ii) where any goods or services held for the purpose of any other business carried on by the assessee were transferred to the eligible business; the consideration, if any, for such transfer as recorded in the accounts of the eligible business should correspond to the market value of such goods or services as on the date of the transfer. Where the consideration so recorded, does not correspond to the market value, the profits and gains of such eligible 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. Thus in such cases, value/consideration disclosed would not be accepted. The aforesaid sub-section accepts and endorses that the eligible undertaking could have transacted or had business transactions with other business or units of the same assessee in form of input/purchases or in the form of output/sales. In either case, the Assessing Officer was entitled to compute the profits of the eligible undertaking on the basis of the market value/price, and ignore and not accept the value mentioned/recorded in the account books. There was no need to prescribe and incorporate sub-section (8) in case the assessee could not have transacted and sold goods or services manufactured/produced by the eligible undertaking to another unit or business of the same assessee. The proviso stipulated that the Assessing Officer in order to compute such profits and gains shall adopt reasonable basis as he may deem fit. Explanation states that the market value in relation to goods or services meant the price that such goods or services would ordinarily fetch in the open market.

++ sub-section (10) postulates that where it appeared to the Assessing Officer that because of the 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 was so arranged, that the business transactions between them produced to the assessee more than the ordinary profits expected to arise from such eligible business, the Assessing Officer shall compute the profits and gains of eligible business by taking into account profits reasonably deemed to have been derived therefrom. Though, sub-section (10) would not be directly applicable in the present case which relates to captive consumption, the provision postulates re-working of the profits in cases where more than expected profits stand declared by the eligible undertaking because of proximity and close connection between the eligible undertaking and the persons to whom goods and services were supplied.

++ similar issue was raised before the Delhi High Court in CIT Vs. Orissa Cement Ltd. [2002] 254 ITR 412 (Delhi), where deduction under Section 80-I was claimed on profits derived from captive consumption of limestone excavated from mines and thereafter used for manufacture of cement in the plant of the assessee. Revenue’s submission that one cannot earn profit by indulging in the business with oneself, was rejected to negate the claim.

++ it was observed that there could be erosion or deviation from the principle that one cannot make profit by trading or doing business with oneself. It would be appropriate to also reproduce the following observations of the Supreme Court in Tata Iron and Steel Co. Ltd. :-

"It could not be disputed that factually the profit from the mining operation and the winning of the mineral is imbedded in the profit realised from the sale of the end product. A simple illustration would demonstrate this. Let us assume that the cost of winning the ore is Rs. 50/- a ton and the market price of similar ore which would have to be used in the absence of the ore mined is Rs. 60/- per ton. There could not be any doubt that this difference of Rs. 10/- per ton of ore would be reflected in the profit and loss resulting from the sale of the steel. It is needles to add that if in a given case the mined product costs more than the market price of the commodity, there would be loss on the mining operation notwithstanding that there is a profit realised from the sale of the end product - steel, but these are matters of calculation not relevant at the present stage, for we are endeavouring to ascertain whether there could in law be a profit when the mined ore is converted into steel in the mills of the mining-company. It thus factually the profit from the mine or from the mining operation is imbedded in the profit from the sale of the steel is there any principle of law which prevents effect being given to this factual position? The learned Attorney-General submitted that in such a situation the "profit" is not a real or an actual profit but is one which is merely notional, and that when the Act spoke of a "profit" it meant an actual, real and realised profit and not a merely notional "profit". We find ourselves unable to accept this submission. We start with the premise that by the sale of the end product a real "profit" has been realised. When analysed it is found that that profit is the aggregate or resultant of the profits from different lines of activity. If arithmetically that total represents the resultant aggregation of different items of activity we fail to see how it could be said that the profit from each item which results in that total is a notional and not an actual or real profit. In the interests of clarity, we should add that the principle would be the same when the sale of the end product yields no profit, but results in a loss, only in such a case, the relevant component, viz, the disintegrated profit or loss resulting from the mining operation would diminish the loss if that were a profit, or add to the loss if that were also a loss. No doubt, there was a further contention urged that you cannot dissect that final profit in order to ascertain its components, but it is quite a different one from that now under consideration and we shall deal with it in its proper place. But what we are now concerned to point out is that if it is capable of dismemberment or disintegration into its components, it would not be correct use of language to designate the profit so apportioned and ascertained as attributable to each line of activity any the less real than the aggregate profit realised from all the ventures. In the way in which we have approached the problem there could be no question involved of any departure from the principle that a man cannot trade with himself. In fact, the principle of dichotomy is brought in by the learned Attorney-General by first disintegrating the business of the appellant into two - first as a mine-owner winning the ore and later by a Steel Manufacturing Co., consuming the won ore and then posing the question as to whether the transfer of the ore from the mining section to the manufacturing one could in law involve a sale of the product so as to yield a "profit". It would be apparent that if one proceeded on the basis of treating the businesses as a single and integrated one, as the learned Attorney-General desired us to do, as one unbroken chain from the start of the mining operation to the sale of the finished steel or steel products by the company - no question of a person trading with himself would arise, but the very different one as to whether there could be a disintegration of the profits of an integrated business, between the component constituents which go to make it up. Undoubtedly, in order to ascertain the profits from the mine there would have to be a disintegration of the gross profits which finally emerge from the sale of the finished steel or steel products. What we desire to point out is that this involves no disintegration of the business affording scope for the contention based upon the principle that a person cannot trade with himself, but the one far removed from it, viz., whether when a profit has been made as a conjoint result of different but integrated operations, the profits so derived could be broken up so as to permit the attribution of specific amounts of profit to each or any of the several operations or activities."

++ thereafter, the Supreme Court in Tata Iron and Steel Co. Ltd. noticed and went into the question whether there was anything in law which prohibits/bars ascertainment of profit and loss attributable to each line of activity, where the sale of the final end product has resulted in profit or loss for the entire venture. Contra argument raised on behalf of the Revenue was rejected for the reasons given in the paragraph which has been quoted in the decision of the Delhi High Court in Orissa Cement Ltd. . We have already noted the statutory provisions of Section 80 IA of the Act and observed that the statutory provisions in fact were to the contrary and stipulate computation of an eligible undertaking’s profit or loss, even when the sales/transactions were made to a related party or to the same assessee, but in such cases, the profits have to be computed in the manner stipulated in sub-sections (10) and (8) to Section 80-IA;

++ it would be appropriate to also notice judgment of the Delhi High Court in CIT Vs. DCM Sriram Consolidated Ltd. 2008-TIOL-576-HC-DEL-IT, wherein explanation clause (iv) to Section 115JA of the Act had come up for interpretation. The clause provided for exclusion of profits derived by an industrial undertaking from the business of generation or generation and distribution of power. Revenue had raised the contention one cannot earn profit by indulging in the business with oneself and thus captive consumption would not be covered by explanation clause (iv) to Section 115JA. Rejecting the contention and relying upon decision in the case of Tata Iron and Steel Co. Ltd., it was observed:-

"Based on the ratio of the Supreme Court in Tata Iron and Steel Ltd it is clear that in arriving at an amount that is to be deducted from book profits 'which is really to the benefit of the assessee as it reduces the amount of tax which it is liable to pay under the provisions of Section 115JA of the Act, the principle of apportionment of profits resting on disintegration of ultimate profits realized by the assessee by sale of the final product by the assessee has to be applied. In applying that principle it is not necessary as was observed by the Supreme Court to depart from the principle no one could trade with himself' even though it pointedly noticed that House of Lords in Sharkey v. Wernher has opined that there was neither a general proposition that no man could trade with himself and make in its true sense or meaning taxable profits by dealing with himself nor was it universally true, and that, there are situations in which a man could be said to make a profit out of the consumption of his own goods. Since the earlier decision of House of Lords had found favour with the Supreme Court in Kikabhai Premchand , the Supreme Court in Tata Iron and Steel Ltd decided the case by applying the principle of disintegration of ultimate profits realized on sale of final product."

++ it has to be held that the finding of the Tribunal that the profits derived by the assessee’s power generation unit would be eligible for deduction as a separate undertaking under Section 80IA, but has referred to the decision in West Coast Paper Mills Ltd. vs. Asstt. Commissioner of Income Tax 2006-TIOL-216-ITAT-MUM is correct.

(See 2014-TIOL-1390-HC-MAD-IT)