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2006 (4) TMI 184 - AT - Income TaxMAT - Deduction u/s 80-IA - Power Unit Nos. I, II, III and IV - installed three windmills for power generation - rate to be adopted for the unit of power generated - whether the assessee's claim for deduction u/s 80-IA, could be denied merely on the ground that these D.G. Units were catering to the captive power requirement - HELD THAT - We are of the opinion that the claim of the assessee cannot be denied only on the ground that the DG sets manufactured the power only for the captive consumption of the assessee. It may be stated that the Tribunal in the assessment years 1997-98 and 1998-99 has already granted relief in respect of Unit Nos. I and II which were established for the purpose captive consumption. Moreover, the provision of section 80-IA(8) itself says that where any goods or service of the eligible business are transferred to any other business carried on by the assessee and the consideration, if any, for such transfer is recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of transfer, then for the purpose of deduction under that section, the profit and gain for such transferred business shall be computed as if the transfer has been made at market value as on that date. In other words, the provisions of section 80-IA themselves provide an answer and give a solution were there is a captive consumption of the finished goods of the eligible units. Thus, the order of the CIT(A) granting 80-IA relief in respect of DG Units I, II, III and IV cannot be found fault with. The other consideration that the assessee has not operated these Units by itself but got them operated through outsiders and therefore the assessee is not entitled for 80-IA relief, in our view, is not a right approach. Such consideration, in our opinion, is not a relevant consideration. Keeping in view the purpose and intent of relief u/s 80-IA, such consideration, in our opinion, is not germane from the provision of section 80-IA of the Act. We have considered the submissions of the parties on this issue and are unable to find any merit in them. The Assessing Officer's adoption of the rate at which it sold the power to TNSEB cannot be accepted since the Units themselves are working at Dandeli in the State of Karnataka and the cost of generation of power in Tamil Nadu and Karnataka are different. Apart from that, the assessee has paid to KSEB for purchase of the power and the CIT(A) has correctly come to a reasonable conclusion that the transfer price should be on the basis of average price paid by the assessee during the whole year to KSEB minus certain extraneous charges such as electricity duty, etc., which is not connected with the business of the assessee. Therefore, the CIT(A) has correctly and reasonably directed the allocation of the indirect expenses for the purpose of arriving at the income of the eligible unit and we decline to disturb such direction of the CIT(A). Accordingly, the grounds raised both by the assessee and the revenue should be taken to have been rejected. MAT - The provisions, in our view, as introduced will have only to take into consideration the element of the tax, duty, cess or fee paid in the sales, purchases and inventory. It will not have an impact on the closing stock carried forward because what can be debited to this year's profit and loss account is the closing stock of the earlier year. There can be no exception to the rule that the closing stock of the earlier year will have to be necessarily the opening stock of this year. The change in the method of valuation of the closing stock as a result of section 145A has an overriding effect on section 145 relating to method of accounting itself. In other words, notwithstanding what is contained in section 145, the provisions of section 145A shall prevail. The sum and substance of that intent can only be achieved by making an addition to the value of the closing stock by its element of tax, duty, cess or fee, etc., and not by altering the opening stock. Whenever the assessees changed their method of accounting from one recognized method to another recognized method, there is bound to be tax effect in the year of change. But, over the year it is tax neutral. On the same analogy, when the Legislature has imposed a new system of valuing the closing stock it is bound to have an impact in that year, but becomes neutral in nature in the subsequent years. We therefore, do not find any infirmity in the order of the CIT(A) on this issue and confirm the same. In the result, both the appeals are dismissed.
Issues Involved:
1. Assessee's claim for deduction under section 80-IA of the Income-tax Act, 1961 for Power Unit Nos. I, II, III, and IV. 2. Determination of the transfer price for power generated and supplied to the paper division. 3. Application of section 145A of the Income-tax Act, 1961 regarding the valuation of inventory. Detailed Analysis: 1. Assessee's Claim for Deduction under Section 80-IA: The primary issue was whether the assessee, a company engaged in the manufacture and sale of paper and paperboards, could claim deductions under section 80-IA for its captive power units. The assessee installed and operated various power units (DG sets) to meet its internal power requirements. The Assessing Officer (AO) denied the deduction, arguing that the power units were only for captive use and not for generating revenue through external sales. The AO cited several legal precedents and interpretations, including the Supreme Court's definition of "business" as a systematic activity aimed at profit-making. The CIT(A) disagreed with the AO, stating that the conditions for deduction under section 80-IA were met, and there was no statutory requirement that power generated should be sold externally. The CIT(A) referenced decisions like CIT v. Orient Paper Mills Ltd. and CIT v. Hindusthan Motors Ltd., which supported the view that captive consumption did not disqualify the claim for deduction. The Tribunal upheld the CIT(A)'s view, emphasizing that the assessee was indeed in the business of power generation and that section 80-IA(8) provided for market value computation in cases of inter-division transfers. 2. Determination of Transfer Price: The AO contended that the transfer price for power generated should not be based on the notional rate of Karnataka State Electricity Board (KSEB) but on the actual rate at which the assessee sold power to Tamil Nadu State Electricity Board (TNSEB). The CIT(A) asked the assessee to provide an alternative calculation based on the average cost of power purchased from KSEB, excluding extraneous charges like taxes and levies. The Tribunal agreed with the CIT(A) that the transfer price should reflect the average cost paid to KSEB, minus extraneous elements, ensuring a realistic and fair valuation for computing profits eligible for deduction under section 80-IA. 3. Application of Section 145A: Section 145A, introduced by the Finance (No. 2) Act, 1998, mandated the inclusion of taxes, duties, cess, or fees in the valuation of inventory. The assessee initially adjusted only the closing stock but later revised the return to include excise duty on the opening stock, claiming a deduction. The AO and CIT(A) rejected this approach, arguing that the adjustment should only apply to the closing stock of the current year to avoid distorting the previous year's valuations. The Tribunal upheld the CIT(A)'s decision, stating that section 145A required the inclusive method for inventory valuation, impacting the closing stock of the current year. Adjusting the opening stock would distort the previous year's financials and was not the intention of the amendment, which aimed to standardize inventory valuation methods prospectively. Conclusion: The Tribunal dismissed both appeals, affirming the CIT(A)'s decisions on all issues. The assessee's claim for deduction under section 80-IA was upheld, the transfer price for power was to be based on the average cost paid to KSEB, and the application of section 145A was to be prospective, affecting only the current year's closing stock.
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