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2022 (3) TMI 538 - HC - Income TaxDetermining the MAT payable for the purpose of Section 115JA - Profit computation on the basis of the realizable value of such power which has been utilized by the Smelter unit for the manufacture of aluminum - excluding the book profit derived by the assessee from the generation of power under clause (iv) of Explanation to Section 115JA(2) - whether power profits are to be determined on the basis of the realizable price i.e. the price at which the power is sold to GRIDCO? - HELD THAT - Delhi High Court referred to the decision of the Supreme Court of India in Tata Iron Steel Ltd. v. State of Bihar 1962 (9) TMI 49 - SUPREME COURT and concluded 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. The interpretation placed on the expression business used in Section 2(b) of the Act and holds that the Assessee here is entitled to reduce from its book profits the profits derived from its CPPs in determining the MAT payable for the purpose of Section 115JA of the Act. Question (i) is therefore answered in favour of the Assessee and against the Department by holding that the AO the CIT(A) as well as the ITAT erred in law in not allowing the claim of the Assessee as deduction under Section 115JA(2)(iv) of the Act relating to power profits . Disallowing entire claim for leave encashment and post retirement medical benefit which has been determined as an accrued liability and computed on the basis of actuarial valuation - AO has treated the liability on the above ground as a contingent liability and added it to the book profits. This has been upheld by the CIT(A) and ITAT - HELD THAT - The Court is of the view that the reasoning of the Supreme Court in HCL Comnet Systems Services Ltd. 2008 (9) TMI 18 - SUPREME COURT should prevail. The Supreme Court there was considering for the purposes of Section 115JA (common explanation (c)) whether the provisions for bad and doubtful debts as claimed by the Assessee should be treated as ascertained or unascertained liability. Adopting the same reasoning as far as the present case is concerned the Assessee s treatment of the liability in respect of the post retirement medical benefits as reflected in its P L account should be accepted by the Department and cannot be questioned. Consequently question (ii) is answered in the negative by holding that the ITAT was not justified in not allowing the entire claim for leave encashment and post retirement medical benefit determined as an accrued liability and computed on the basis of actuarial valuation.
Issues Involved:
1. Computation of 'book profit' derived from power generation under Section 115JA(2)(iv) of the Income Tax Act, 1961. 2. Allowance of claims for leave encashment and post-retirement medical benefits based on actuarial valuation. Detailed Analysis: Question (i): Computation of 'book profit' derived from power generation The Appellant, National Aluminium Company Limited (NALCO), challenged the Income Tax Appellate Tribunal's (ITAT) decision regarding the computation of 'book profit' derived from power generation under Section 115JA(2)(iv) of the Income Tax Act, 1961. The key issue was whether the profit should be computed based on the 'realizable value' of the power utilized by the Smelter unit for manufacturing aluminum. The Appellant, a Government of India enterprise, generates power in its Captive Power Plant (CPP) and uses it internally for aluminum production, with surplus power sold to GRIDCO. The Appellant argued that the CPP is an independent accounting unit with separate books, and the profit from power generation should be eligible for deduction under Section 115JA(2)(iv) when computing taxable book profits. The Assessing Officer (AO) and subsequent appellate authorities disallowed the claim, arguing that the Appellant could not derive profit from internal consumption of power, as it amounted to selling power to itself. The ITAT upheld this view, stating that Section 115JA(2)(iv) does not imply that a person can sell to themselves. The Court referred to a similar case adjudicated by the Delhi High Court in M/s. DCM Sriram Consolidated Ltd., which held that profit derived from internal power transfer is embedded in the ultimate profit earned from the sale of final products. The Court concurred with this interpretation, stating that the term 'business' in Section 2(b) of the Act includes captive power generation for internal use. Consequently, the Assessee is entitled to reduce its book profits by the profits derived from its CPPs when determining MAT payable under Section 115JA. The Court ruled in favor of the Assessee, holding that the AO, CIT(A), and ITAT erred in law by not allowing the deduction of ?45,48,73.179 as 'power profits' under Section 115JA(2)(iv). Question (ii): Allowance of claims for leave encashment and post-retirement medical benefits The second issue concerned whether the ITAT was justified in not allowing the entire claim for leave encashment and post-retirement medical benefits, which were determined as accrued liabilities based on actuarial valuation. The Assessee, following comments from the Comptroller and Auditor General (CAG) and Accounting Standard 15, provided for these liabilities from AY 1997-98. The AO treated the liability of ?441 lakhs as contingent and added it to the book profits, a decision upheld by the CIT(A) and ITAT. The Assessee relied on the Supreme Court's decision in Commissioner of Income Tax-IV, Delhi v. M/s. HCL Comnet Systems & Services Ltd., which held that provisions for bad and doubtful debts should be treated as 'ascertained liabilities' for the purposes of Section 115JA. The Supreme Court emphasized that such provisions, reflecting probable diminution in asset value, should not be added back to the net profit for computing book profit. Applying this reasoning, the Court concluded that the Assessee's treatment of the liability for post-retirement medical benefits in its P&L account should be accepted as 'ascertained liability.' Therefore, the ITAT was not justified in disallowing the entire claim based on actuarial valuation. The Court answered the second question in the negative, setting aside the ITAT's order and corresponding orders of the CIT(A) and AO on this issue. Conclusion: The appeal was allowed, with the Court ruling in favor of the Assessee on both issues. The orders of the ITAT, CIT(A), and AO were set aside, and no costs were awarded.
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