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Issues Involved:
Exclusion of 90% of wind energy income under the provisions of Explanation (baa) to Section 80HHC of the Income Tax Act. Detailed Analysis: Issue: Exclusion of 90% of Wind Energy Income under Explanation (baa) to Section 80HHC Background: The assessee, engaged in manufacturing reclaimed rubber, filed a return for the assessment year 2003-04 showing a total income of Rs. 1,25,03,298. The assessee had entered into an agreement with the Tamil Nadu Electricity Board (TNEB) to install a windmill for generating power for its factory. The income from wind energy generation was Rs. 14,82,673, which the AO excluded 90% from business profits for calculating deduction under Section 80HHC. This exclusion was upheld by the CIT(A). AO's Reasoning: The AO argued that the income from wind energy generation should not be included in the business profits for Section 80HHC deduction, citing the Supreme Court's decision in Pandian Chemicals Ltd. vs. CIT, which clarified that the term "derived from" does not cover every receipt connected with the industrial undertaking. The AO contended that including wind energy receipts would distort the eligible deduction. CIT(A)'s Confirmation: The CIT(A) confirmed the AO's action, stating that the income from wind energy generation had no direct nexus with the manufacturing activity of reclaimed rubber. The CIT(A) referenced the Supreme Court's decision in Pandian Chemicals Ltd. vs. CIT, emphasizing that mere commercial connection is insufficient for inclusion under Section 80HHC. Assessee's Argument: The assessee argued that the windmill was an integral part of its manufacturing activity, generating less than 10% of the electricity required. The income from wind energy was shown as both a credit and debit entry in the P&L account, representing a notional income. The assessee relied on the Supreme Court decision in Godhra Electricity Co. Ltd. vs. CIT, arguing that the amount could not be treated as income as there was no right to receive it. Tribunal's Analysis: The Tribunal examined the scheme of Section 80HHC, which allows deductions for profits derived from exports. The formula for calculating export profits assumes business profit is directly proportional to turnover. However, receipts like brokerage, commission, interest, rent, and charges, which are not included in turnover, distort this formula. Explanation (baa) to Section 80HHC was introduced to exclude such receipts from business profits. Key Questions: 1. Did the assessee receive any income from its windmill within the meaning of Explanation (baa) to Section 80HHC? 2. If yes, do the provisions of Explanation (baa) apply to such income? Tribunal's Findings: - The windmill was installed to meet part of the assessee's electricity requirement, not for selling power to TNEB. - The electrical energy generated was used in the factory, reducing the electricity charges payable to TNEB. - The amount of Rs. 14,82,673 represented a reduction in costs, not a receipt, and thus did not fall under Explanation (baa). - The Tribunal emphasized that the AO cannot dictate the business model of the assessee and must view the matter from the perspective of a prudent businessman, as held in S.A. Builders Ltd. vs. CIT (A). Conclusion: The Tribunal concluded that the amount of Rs. 14,82,673 did not represent a receipt within the meaning of Explanation (baa) to Section 80HHC. The approach of the lower authorities was erroneous and unsustainable in law. The Tribunal decided in favor of the assessee, allowing the appeal. Result: The appeal filed by the assessee was allowed.
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