9911796707
TMI Blog2006 (4) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... re and sale of paper and paperboards, multi layer boards, etc. During the assessment year 1996-97, the assessee installed three windmills for power generation in the d State of Tamil Nadu and set up one DG set (identified as unit No. I) for the purpose of generation of power, which was used to meet the requirement of power in the unit manufacturing paper at Dandeli in Karnataka. Similarly another DG set (identified as Unit No. II) was taken on lease and operated by the assessee in the assessment year 1997-98 for the same purpose and also in the assessment year in question. In assessment year 1999-2000, the assessee has taken on lease two more such sets (identified as unit Nos. III and IV) for the same purpose. As there was a loss from power generation from the windmill unit, no deduction under section 80-IA has been claimed. We are not concerned with that unit at all in this appeal. As regards unit Nos. I, II, III and IV the assessee claimed deduction under section 80-IA to the extent of Rs. 7,85,06,996. As the facts reveal, these power units were mainly in the nature of captive power units catering to the requirements of the paper plant. The Assessing Officer took the stand that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricity Board for purchase of power by it from the assessee. Nor any rate has been fixed. Therefore, the assessee's adoption of rate of which K.S.E.B. supply power to industrial users is purely notional and has no semblance of reality. Further these rates are otherwise also unrealistic as K.S.E.B. is not expected to purchase power from the assessee, if at all it does at any future date, at the same rate at which it supplies power to the industrial users. The assessee has not shown that any power has been sold to KSEB in any future year also till date. (III) That Hon'ble Calcutta High Court in the case of Universal Electrics Ltd. v. CIT (196 ITR 860) in which the assessee company engaged in manufacturing of electrical item and installed generator for its own purpose and claim initial depreciation under section 32(1)(vi) held that the assessee company was not entitled to initial depreciation under section 32(1)(vi). The Hon'ble Calcutta High Court held as under: "Section 32(1)(vi) providing for initial depreciation was introduced with effect from April 1, 1975. It is available in respect of the following assets namely (i) New ships & new aircraft acquired by a person e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erate income. Business activity or transaction necessarily implies the activity with an object to earn profit. To regard an activity as business there must be course of dealings either actually contained or contemplated to be contained with a profit motive, and not for sport or pleasure. Whether a person carried on business in a particular commodity must depend upon the value, frequency, continuity and regularity of transaction of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive. (V) The Hon'ble Supreme Court in the case of Barendra Prasad Ray v. ITO (129 ITR 295) has held that the word "business" implies commercial transaction with the view of making profit and gain therefrom. Therefore carrying on business connotes some substantial, systematic and organized activity with the object of making gain and profit therefore, with the inevitable control and direction qua such activity of business. Consequently, the two faces of the coin of carrying on a business imply a control or direction of the business activity with a direct or indirect nexus with the profits or losses therefrom of course, subject to any express term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its is an industrial undertaking engaged in the generation of power with the aid of power and, according to him, whether a capital unit is entitled for such relief was settled by the Apex Court in Orient Paper Mills Ltd.'s case and also by the Calcutta High Court in the case of Universal Electrics Ltd. v. CIT [1992] 196 ITR 860, wherein an identical issue was involved. He also relied upon the CBDT Circular No. 1116. He also considered the fact that in the assessee's own case for assessment year 1998-99 his predecessor has decided the issue in favour of the assessee. Therefore, in principle, he held that the assessee is eligible for deduction under section 80-IA of the Act in respect of the profit derived from the business of generation and distribution of power. Then he addressed to the issue regarding the computation of profits derived from such business of generation and distribution of power. The assessee has worked out the transfer price on the basis of estimated Karnataka State Electricity Board (KSEB) rate which would be applicable for the capacity of the captive power unit. In the calculation, therefore, price of power produced by the different units were different d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other direct expenses have been debited, certain administrative overheads have not been so included. According to the profit and loss account of the assessee, the following expenses have to be proportionately debited to the profit and loss account of the power units: 1 Vehicle maintenance Rs. 56,99,913/- 2 Misc. expenses Rs. 3,73,97,154/- 3 Auditors payments Rs. 2,35,904/- 4 Director's fees and expenses Rs. 30,647/- 5 Charity and donation Rs. 1,80,402/- 6 Cost auditor remuneration Rs. 18,50,000/- The assessee argued that while working out the proportionate calculation it should be kept in mind that only the amount proportionate to the electricity generated through power units I, II, III and IV should be taken into consideration. Secondly, a large part of the miscellaneous expenses did not relate to the power' units and, therefore, only 50 per cent of those expenses should be included in such calculation. The Assessing Officer was directed by the CIT(A) to determine the proportionate amount of expenses on the above heads to be allocated to the Power Units I to IV on the basis of the turnover of those units. As regards miscellaneous expenses the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case, Ld. CIT (Appeals) failed to appreciate the fact that the "Transfer Price" of power adopted by the appellant for computation of deduction under section 80-IA in respect of power generating unit was in accordance with the provisions of the-then section 80-IA(9) of the Income-tax Act, 1961. (3) That on the facts and in the circumstances of the case, Ld. CIT (Appeals) erred in directing the Assessing Officer to prorate the indirect expenses of the company in the computation of profit of the power generating unit for computation of deduction under section 80-IA." 5. The learned Departmental Representative addresses on the revenue's grievances at great length and took pain to take us through the findings of the Assessing Officer. The learned Departmental Representative promptly put us through pages 179 to 200 of the assessee's paper-book, which contain photographs of the power generating units of the assessee. The learned Departmental Representative submitted that one of the important conditions under section 80-IA is that such unit should not be formed by transfer to a new business of machinery or plant previously used for any purpose. Drawing our att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade because of the loss. In assessment year 1997-98, unit No. II was installed. The said unit was taken on lease, but operated by the assessee. In assessment year 1997-98 the assessee acquired unit No. II by taking the same on lease and operated both unit Nos. I and II and the assessee's claim for assessment year 1997-98 for deduction under section 80-IA has already been accepted by the Tribunal in ITA No. 382/Mum./2001 vide its order dated 21-6-2005. A copy of the Tribunal order is placed at pages 192 to 195 of the paper-book. In the said order the Tribunal has held that the assessee is entitled for deduction under section 80-IA on the income imputable from the generation of power, although the said power generated from the two DG units was for captive consumption. The Tribunal was of the view that there is no fetter against the assessee using the power for self-consumption. The Tribunal accepted the contention of the assessee by following the decision of the Supreme Court in Textile Machinery Corpn. Ltd.'s case and also the decision of the Bombay High Court in CIT v. Sahney Steel and Press Works (P.) Ltd [1989] 177 ITR 354. The Tribunal also addressed itself on the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required for the units it does not loose the identity of the unit. Each of the unit stands on its own and produces the power required for captive consumption. There is no splitting up of the business already in existence. Atleast, this was not the line on which the Assessing Officer has examined the issue while he denied the deduction under section 80-I of the Act to the assessee. The only ground was that captive consumption of power does not result in the realization of revenue. The learned counsel further pointed out that the assessee is in the business of generation of power. It has established the windmills in Tamil Nadu as a part of its business venture, so also the captive power units to meet its own requirement of power in its main manufacturing plant. In this connection, reliance was placed on the decision in CIT v. Neo Pharma (P.) Ltd [1982] 137 ITR 879 (Bom.); Commissioner of Customs v. Indian Oil Corpn. Ltd. [2004] 267 ITR 272 (SC) and Collector of Central Excise v. Dhiren Chemical Industries [2002] 254 ITR 554 (SC). Drawing support from these decisions the learned counsel for the assessee pleaded for upholding the order of the CIT(A) insofar as it relates to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of caustic soda, an essential chemical for use in the process of manufacture of paper. The assessee obtained a separate licence for the manufacture of caustic soda and the plant was housed in a separate building. The Income-tax Officer in that case held that the caustic soda plant was ancillary to the main manufacturing unit and no part of caustic soda was sold to any outsider and therefore no relief could be claimed by the assessee under section 15C of the 1922 Act. The material produced in the plant was used for captive consumption. Before the Tribunal it was contended by the revenue that the language used in section 15C was "profit and gain derived from an industrial undertaking". Unless the profits arose by the sale of the product of the new plant, no profit could be said to have been derived. The argument was that profit should be directly derived and not indirectly or deemed to be derived. The Tribunal did not accept these submissions of the revenue and proceeded to grant the relief. The Hon'ble Calcutta High Court confirmed the order of the Tribunal and the Apex Court has dismissed the appeal of the revenue by taking support from its own decision in Textile Machiner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e units. In the light of these discussion 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 under section 80-IA, such consideration, in our opinion, is not germane from the provision of section 80-IA of the Act. 7. That leaves us with the issue relating to the rate td be adopted for the unit of power generated and supplied to the paper division, which would impact the profit to be determined for the purpose of section 80-IA of the Act. The assessee adopted the rate at which KSEB supplied power to industrial user which the Assessing Officer considered to be purely a notional rate and has no semblance or reality. These rates, according to the Assessing Officer, were unrealistic as KSEB is not expected to purchase power from the assessee and it is also unrealistic to expect KSEB to purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent. 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. 8. The next dispute in the assessee's appeal arose on account of a newly inserted provision of section 145A of the Act. Section 145A was inserted by the Finance (No. 2) Act, 1998 and effective from the assessment year 1999-2000, which reads as under: "Method of accounting in certain cases.-Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aborately the amendment to section 145A of the Act and was of the opinion that the contentions of the assessee are not acceptable. According to him even when a legal fiction is created it has to be interpreted in a manner practicable. If the contentions that the opening stock also requires revision on account of amendment to section 145A of the Act were to be accepted, it would mean the re-computation of the closing stock value of the earlier year, which is not the intention of the Legislature. He discussed the fact that earlier proposal was to give a retrospective effect but amendment was introduced prospectively. The CIT(A) after discussing the Jurisdictional High Court decision in the case of Melmould Corporation v. CIT [1993] 202 ITR 789 (Bom.) and the decision of the Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 and the Karnataka High Court decision in CIT v. Corporation Bank Ltd. [1988] 174 ITR 616, upheld the determination made by the Assessing Officer. 9. The learned counsel for the assessee vehemently reiterated the contentions that were taken before the revenue authorities and drew our attention to pages 130 to 146 of the paper book and also to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this amendment, the purchases and sales as well as inventory shall always include the element of tax, duty, cess or fee paid. Therefore, in the year when the provisions are implemented for the first time, there is bound to be an impact in that year, whereas in the subsequent year whatever valuation is put to the closing stock will surface as opening stock and thereby a debit to that year's profit and loss account. In other words, the changed method will have neutral tax effect over the years. Only the method of valuation of the closing stock gets switched over from exclusive method to inclusive method. If the assessee is allowed to adjust the opening stock of the year in question then it would amount to distortion of the value of the closing stock of the earlier year. Unless such addition is made in the earlier year, the debit to this year's profit and loss account by means of addition to the opening stock will reduce the taxable income and will only result in not applying the provisions of section 145A of the Act in the year in question. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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