2014 (8) TMI 558 - HC - Income Tax

Deduction u/s 80IA Profit and gain from captive consumption of electricity - Whether the electricity unit is an undertaking for the purpose of Section 80-IA and whether profit and gain from captive consumption of electricity supplied from the generator set and which cannot be sold to any third person will qualify for deduction u/s 80-IA Held that - Sub-section (10) would not be directly applicable 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 Relying upon CIT Vs. Orissa Cement Ltd. 2001 (11) TMI 60 - DELHI High Court - Revenue s submission that one cannot earn profit by indulging in the business with oneself, was rejected to negate the claim. The finding of the Tribunal that the profits derived by the respondent-assessee s power generation unit would be eligible for deduction as a separate undertaking u/s 80IA - the Tribunal has passed an order of remand on the question of computation of profit and gain from business in terms of sub-section (8) to Section 80IA - the AO is competent to decide the question as per law and the hands and power of the AO have not been curtailed and the order does not give any specific or clear finding/direction Decided against Revenue.

Issues Involved:
1. Whether the electricity unit is an undertaking for the purpose of Section 80-IA of the Income Tax Act, 1961.
2. Whether "profit and gain" from captive consumption of electricity supplied from the generator set and which cannot be sold to any third person will qualify for deduction under Section 80-IA of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the electricity unit is an undertaking for the purpose of Section 80-IA of the Income Tax Act, 1961:

The respondent-assessee, engaged in manufacturing various products, had set up a power plant at Porbandar, Gujarat, for captive supply to its Aluminium Oxide grains unit. The profit earned from this power plant unit was claimed to be eligible for deduction under Section 80-IA of the Income Tax Act, 1961, as an undertaking engaged in the generation of electricity. The Assessing Officer denied this benefit, arguing that the power plant was supplying captive power and not to third parties, and thus, the respondent-assessee could not have earned profit as "one cannot undertake or do business with oneself."

The court examined Section 80-IA (1), (5), (8), and (10) of the Act, which stipulate that the benefit of Section 80-IA would be available when the gross total income of an assessee includes profits and gains derived by an undertaking from eligible business specified in sub-section (4). It was noted that generation of electricity was indeed an eligible business. The court emphasized that the statutory provisions require 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.

The court referenced the Delhi High Court's decision in CIT Vs. Orissa Cement Ltd., where it was held that one could earn profit from captive consumption, and the principle that one cannot make profit by trading with oneself could be eroded or deviated from under certain circumstances. Similarly, the Madras High Court in Tamilnadu Petro Products Ltd. Vs. Assistant Commissioner of Income Tax held that profits from captive consumption would be eligible for deduction under Section 80-IA.

2. Whether "profit and gain" from captive consumption of electricity supplied from the generator set and which cannot be sold to any third person will qualify for deduction under Section 80-IA of the Income Tax Act, 1961:

The court discussed that sub-section (8) of Section 80-IA stipulates that where goods or services held for the purpose of eligible business are transferred to any other business carried on by the assessee, the consideration for such transfer should correspond to the market value. If not, the profits and gains of the eligible business shall be computed as if the transfer had been made at the market value. This provision endorses that the eligible undertaking could have transactions with other units of the same assessee.

Sub-section (10) allows the Assessing Officer to re-work the profits in cases where more than expected profits are declared due to close connections between the eligible business and any other person. Although sub-section (10) was not directly applicable to captive consumption, it supports the principle that profits from internal transactions can be computed for tax benefits.

The court also referenced the Supreme Court's decision in Tata Iron and Steel Co. Ltd., which held that profits from different lines of activity contributing to the final profit could be disintegrated and attributed to each activity. This principle was applied to ascertain profits from captive consumption.

The Delhi High Court in CIT Vs. DCM Sriram Consolidated Ltd. also rejected the contention that one cannot earn profit by indulging in business with oneself, supporting the principle of disintegration of ultimate profits realized from the sale of the final product.

Conclusion:

The court concluded that the profits derived by the respondent-assessee's power generation unit from captive consumption would be eligible for deduction under Section 80-IA. The Tribunal's decision, which referred to the West Coast Paper Mills Ltd. case, was upheld. The substantial questions of law were answered in favor of the respondent-assessee.

The court also noted that the Tribunal had remanded the question of computation of profit and gain from business in terms of sub-section (8) to Section 80-IA. The Assessing Officer was deemed competent to decide this question as per law, and both parties were entitled to raise their contentions on the computation of eligible profit/loss from the eligible business.

Disposition:

The appeals were disposed of with no costs.

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