2004 (8) TMI 364 - AT - Income Tax

Deduction u/s 80-IB for lignite production - Allocation of indirect cost of production of lignite to Stage-II - Allowance of deduction u/s 80-IA in respect of grossed-up taxes -Whether the activity of mining constitutes manufacture or production of any article or a thing - HELD THAT - As per the Explanation to s. 33B industrial undertaking means any undertaking which, inter alia, was engaged in the business of mining. Thus, prior to the amendment of s. 80-IA, by the Finance Act, 1999 w.e.f. 1st April, 2000, because of the statutory provision itself being there, the deduction under s. 80-IA could not be denied to the assessee, since mining activity came within the eligibility of deduction under s. 80-IA. Then again we have before us s. 33(1)(b)(i) in the form of statutory evidence, according to which where machinery or plant is installed for the purpose of business or construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, it would be entitled for development rebate. Items mentioned at Sl. No. 3 of the Fifth Schedule include lignite. Thus, here again the activity of excavation of lignite is treated as production of article or thing. Sec. 80-IB(9) entitles an undertaking engaged in commercial production or refining of mineral oil for purposes of deduction under s. 80-IB. It is noticeable that in the Fifth Schedule noted earlier at Sl. No. 3 along with coal, lignite etc., mineral oil has also been mentioned. Thus, by applying the principle of ejusdem generis it can be reasonably concluded that excavation of lignite would also come within the term production of any article or thing. Deduction u/s. 80-IA in respect of lignite production - In the present case, we find that lignite is found embedded beneath the earth in huge blocks. However, it can be put to use only after it is crushed to a uniform 50 to 150 mm size and after all the impurities are removed and the excavated lignite is blended. Therefore, it cannot be held that the lignite which is put to use is in the same form in which it is found embedded in earth. The test laid down in various judicial precedents is consistent and it is whether the article produced is regarded in the trade by those who trade in it as distinct in identity from the commodity involved in its manufacture. We are of the opinion that keeping in view the statutory evidence in the form of various sections noted earlier, the various stages involved in the process and the decisions of the Hon ble Madras High Court in the case of Gomatesh Granites 1998 (10) TMI 17 - MADRAS HIGH COURT , Hon ble Bombay High Court in the case of Sesa Goa Ltd. 2003 (7) TMI 30 - BOMBAY HIGH COURT the irresistible conclusion is that the assessee was engaged in the production of lignite. As noted earlier, the Hon ble Madras High Court in Gomatesh Granites has clearly held that the term production is of much wider import and, therefore, applying the same principles, we set aside the order of the learned CIT on this point and restore this issue back to the file of the AO to examine the fulfillment of other conditions under s. 80-IB in accordance with law. In the result, this ground is allowed for statistical purposes. Allocation of indirect cost of production of lignite to Stage-II - The assessee had adopted an in-house mechanism for price fixation due to which profits of Stage-II considerably swelled. Therefore, apportionment of cost on the basis of ratio of tonnage of the extraction of lignite was not correct. It should have been done on the basis of actuals. The important aspect is in regard to allocation of power cost. The learned counsel has also submitted that transfer price is fixed on the basis of actual cost involved in the production. Therefore, the assessee should furnish the actual cost of power consumed for Stage-II for computing correct profit of Stage-II. This ground is accordingly allowed for statistical purposes. However, we may clarify that this issue will be relevant only when assessee satisfies the AO regarding fulfillment of conditions u/s. 80-IB. Allowance of deduction under s. 80-IA in respect of grossed-up taxes - Admittedly, agreement was entered into with various electricity boards for supply of power and was titled as bulk power supply agreement. Clause 4 of the said agreement is with regard to the computation of generation tariffs. Annexure-A to the said agreement referred to in cl. 4.1 lays down the principles and parameters for fixation of generation tariffs. One of the items mentioned in the said Annexure is for including the rate of return on equity and internal resources at 12 per cent for both power station and mine. Clause 6 of the agreement deals with the liability in respect of income-tax, if any, on the income stream of NLC. It also lays down the overall limit of income-tax reimbursement by recipient. It is noticeable in this connection that cl. 4 dealing with tariff does not refer to tax liability on income. Clause 4 and cl. 6 are independent clauses. Therefore, it is wrong to conclude that income-tax reimbursement to the limited extent as contained in cl. 6 was part of tariff. The combined reading of all these clauses clearly indicate that it is primarily the income-tax liability of the recipient on its income relating to a particular stream which has to be reimbursed to the assessee. This cannot be held to be income derived from industrial undertaking and, therefore, was rightly held by the learned CIT as not being part of sale-price of power. This ground is accordingly dismissed. In the result, the appeal is treated as partly allowed for statistical purposes.

Summary

Issues Involved:
1. Jurisdiction of CIT invoking provisions u/s 263 of the IT Act.
2. Disallowance of business deduction of Rs. 180.92 crores for arrears of salary.
3. Change in basis of valuation of closing stock of urea.
4. Allowability of deduction u/s 80-IA for lignite production.
5. Allocation of indirect cost of production of lignite to Stage-II.
6. Allowance of deduction u/s 80-IA in respect of grossed-up taxes.

Summary:

1. Jurisdiction of CIT invoking provisions u/s 263 of the IT Act:
The ground challenging the assumption of jurisdiction by CIT was not pressed before the tribunal as the Committee on Disputes had not accorded its approval. Accordingly, this ground was dismissed as not pressed.

2. Disallowance of business deduction of Rs. 180.92 crores for arrears of salary:
The CIT directed the AO to disallow the business deduction of Rs. 180.92 crores, being arrears of salary. The assessee contended that the liability was created as per Accounting Standard-4 and cited the decision in Bharat Earth Movers Ltd. vs. CIT. The tribunal found that the process for pay revision started in 1999 and that the provision for liability was justified as services had already been rendered before 31st March 2001. The tribunal allowed this ground and set aside the order of the CIT.

3. Change in basis of valuation of closing stock of urea:
The CIT held that the change in the method of accounting for valuation of closing stock of urea resulted in undervaluation by Rs. 18.6 crores. The tribunal noted that the change was due to uncertainty in the acceptance of claims by the government and was mentioned in the balance sheet and accepted by the Comptroller and Auditor General of India. The tribunal set aside the order of the CIT, allowing the change in method of accounting.

4. Allowability of deduction u/s 80-IA for lignite production:
The CIT held that the mining activities did not involve the manufacture or production of any article or thing and thus denied the deduction u/s 80-IA. The tribunal, after examining the detailed process of lignite production and various judicial precedents, concluded that the assessee was engaged in the production of lignite. The tribunal set aside the order of the CIT and restored the issue to the AO to examine the fulfillment of other conditions under s. 80-IB.

5. Allocation of indirect cost of production of lignite to Stage-II:
The CIT did not agree with the assessee's apportionment of indirect costs to two stages based on the ratio of tonnage of extraction and adopted a different formula. The tribunal found that the apportionment should be done on the basis of actual costs and directed the assessee to furnish the actual cost of power consumed for Stage-II. This ground was allowed for statistical purposes, subject to the fulfillment of conditions under s. 80-IB by the assessee.

6. Allowance of deduction u/s 80-IA in respect of grossed-up taxes:
The CIT noted that the assessee included income-tax reimbursement in its eligible income for deduction u/s 80-IA. The tribunal observed that the agreement with electricity boards was for the purchase of power and not for actual tax reimbursement. The tribunal upheld the CIT's decision that this income was not derived from the industrial undertaking and dismissed this ground.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions for further examination by the AO on certain issues.