All the appeals are by the revenue assailing orders of various high courts dismissing its appeals filed under Section 260A of the Income Tax Act, 1961. The core and common issue raised in all the appeals is the recomputation of deduction under Section 80 IA of the Income Tax Act, 1961 by the assessing officer which was set aside by the Income Tax Appellate Tribunal and upheld by the High Courts by accepting the contention of the assessee. The first additional issue is whether the Income Tax Appellate Tribunal could ignore compliance to statutory provision relating to exercise of option to adopt Written Down Value (WDV) method in place of straight line method while computing depreciation on the assets used for power generation. Revenue has also raised the issue of expenditure in Civil Appeal No.7425 of 2019 (Commissioner of Income Tax Vs. Since we have taken Civil Appeal No.13771 of 2015 as the lead appeal insofar the core issue is concerned, all reference for the sake of convenience would be to the facts of this appeal. Since electricity supplied by the State Electricity Board was inadequate to meet the requirements of its industrial units, the assessee set up captive power generating units to supply electricity to its industrial units. The deduction claimed under Section 80 IA related to profits of the power generating units of the assessee. Assessee had entered into an agreement on 15.07.1999 with the State Electricity Board as per which assessee had supplied the surplus electricity to the State Electricity Board at the rate of Rs.2.32 per unit. Assessing officer observed that the profit calculated by the assessee (power generating units) at the rate of Rs.3.72 per unit was not the real profit; the price per unit was inflated so that profit attributable to the power generating units could qualify for deduction from the taxable income under the Act.
Therefore, the assessing officer restricted the claim of deduction of the assessee under Section 80 IA at Rs.48,11,72,000.00 (Rs.80,10,38,505.00 – Rs.31,98,66,505.00). The grievance of the assessee before the Tribunal in its appeal was against the action of CIT (A) in affirming the reduction of deduction under Section 80 IA of the Act made by the assessing officer at 9 Rs.48,11,72,000.00 as against Rs.80,10,38,505.00 claimed by the assessee. After referring to the provisions of Section 80 IA of the Act, more particularly to sub-section (8) of Section 80 IA and also upon an analysis of the meaning of the expression “market value”, Tribunal came to the conclusion that the price at which electricity was supplied by the assessee to the State Electricity Board could not be equated with the market value as understood for the purpose of Section 80 IA (8) of the Act.
The High Court in its order dated 02.09.2008 disposed of the appeal by following its order dated 02.09.2008 passed in the connected ITA No.544 of 2006 (Commissioner of Income Tax, Hisar Vs. It has contended that the only issue to be considered is whether deduction claimed by the assessee under Section 80 IA of the Act should be computed by taking Rs. In order to ensure uninterrupted power supply which was crucial for attaining operational efficiency, the captive power generating units were set up by the assessee to meet the power requirements of its manufacturing units. In terms of the Electricity (Supply) Act, 1948 read with the provisions of the power purchase agreement entered into between the assessee and the State Electricity Board, the surplus power that was not captively consumed could not be sold in the open market to any third party consumer except with the prior permission of the State Electricity Board, that too, subject to technical feasibility and on the terms and conditions imposed by the State Electricity Board. Supply of electricity from the captive power plants to its manufacturing units was made and recorded at the price at which electricity was sold by the State Electricity Board to the manufacturing units owned by the respondent assessee and to other industrial consumers, being the fair market value of electricity in terms of Section 80 IA (8) of the Act. 2.32 per unit since that was the price as per the agreement which could not be treated as the market value of power in as much as the State Electricity Board was the only buyer of the surplus power. After referring to Circular No.169 dated 23.06.1975 of the Central Board of Taxes Direct (CBDT), respondent assessee has contended that sub-section (8) of Section 80 IA seeks to provide that the profits of the eligible business should be computed by reckoning inter unit transfer of goods and services at the price such goods would ordinarily fetch on sale in the open market.
However, in case of any transaction of purchase and sale taking place on account of certain obligations on the part of either side affecting the determination of the price of the goods, such a price cannot be said to be the market price. The agreement stipulated that assessee could not sell surplus power generated by it to other consumers except on the terms and conditions stipulated by the Board thereby making third party sale of surplus power unviable. the rate at which the surplus power was supplied by the assessee to the State Electricity Board was not the rate at which the power was available in the open market. In the above context, respondent assessee has asserted that the rate fixed by the State Electricity Board for purchase of surplus power from the assessee cannot be treated as the market price of power.
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Respondent has also mentioned that for the assessment year 2000-2001, the assessing officer had sought to disturb the book 18 profits computed under Section 115 JA of the Act by substituting Rs.2.32 per unit as the price for sale of power generated including for the power captively consumed by the manufacturing units of the respondent. It was thus clear that assessee was showing higher receipts and thereby higher profits from power generation which in turn was used to claim higher deduction under Section 80 IA of the Act. 3.72 charged by the State Electricity Board from its consumers could not be treated as the true market value because the State Electricity Board had to take into account various factors while determining the rate of electricity.
Rupesh Kumar, learned counsel submits that the definition of “market value” as appearing in sub-section (8) of Section 80 IA has to be given a reasonable meaning.
Adverting to the provisions of the Electricity (Supply) Act, 1948, learned counsel submits that under Section 43 thereof, the 21 State Electricity Board may enter into agreements with any person producing electricity within the state for the purchase of the same by the said board of any surplus electricity which that person may be able to dispose of, on such terms as may be agreed upon. He submits that market value or market price is relatable to the price at which the goods are available in the open market where prices are determined by the laws of supply and demand.
Therefore, the price paid by the State Electricity Board to the assessee for supply of excess electricity would be the market value which would mean that Rs. The benefit can only be claimed on the basis of rates fixed by the tariff regulatory commission for sale of electricity by the generating companies. It is submitted that revenue is not justified in treating the price of electricity paid by the State Electricity Board to the assessee for 24 supply of surplus electricity by the assessee to the said electricity board as the market value replacing the market value of electricity per unit projected by the assessee. Assessee had claimed deduction under this provision and while computing the deduction had taken the price at which electricity was supplied by the State Electricity Board to the industrial consumers including the assessee as the market value and not the price paid by 25 the State Electricity Board to the assessee for the supply of surplus electricity. Revenue had questioned computation of market value of electricity supplied by the captive generating plants of the assessee to its industrial units as being on the higher side and thereafter contended that the rate at which the assessee sold surplus power to the State Electricity Board was the market value of electricity. Sub-section (8) of Section 80 IA provides that for the purpose of deduction under Section 80 IA, profits and gains of eligible business are to be computed as if the transfer was done on the market value on that date. In such situation, Tribunal was fully justified in holding that the rate at which electricity was supplied by the State Electricity Board to the industrial consumers was the market value of electricity supplied by the captive power plants of the assessee to its industrial units.
Such a contract can be termed as a captive contract as the assessee had no other option but to accept the terms and conditions including the rate offered by the State Electricity Board. Therefore, the market value in such circumstances can only be the rate at which the State Electricity Board was supplying electricity to the industrial consumers including the assessee. Let us first take up sub-section (1), which reads as under: (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise referred to in sub-section (4) (hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be 29 allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the first five assessment years commencing at any time during the periods as specified in sub-section (2) and thereafter, twenty-five per cent of the profits and gains for further five assessment years : Such deduction shall be allowed from the profits and gains of an amount which is equivalent to hundred percent of the profits and gains derived from such business for the first five assessment years as specified in sub-section (2) and thereafter twenty five percent of the profits and gains for a further period of five assessment years. Since there is a reference to sub-section (2) in sub-section (1), we may mention that as per sub-section (2), the deduction specified in sub-section (1) may be claimed by the assessee at its option for any ten consecutive assessment years out of fifteen years 30 beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or generates power or commences transmission or distribution of power. Therefore, the same is extracted as under: (4) This section applies to— (i) any enterprise carrying on the business of (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating any infrastructure facility which fulfils all the following conditions, namely :— (a) it is owned by a company registered in India or by a consortium of such companies; (b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating a new infrastructure facility subject to the condition that such infrastructure facility shall be transferred to the Central Government, State Government, local authority or such other statutory body, as the case may be, within the period stipulated in the agreement; (c) it has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995: Provided that where an infrastructure facility is transferred on or after the 1st day of April, 1999 by an enterprise which developed such infrastructure facility (hereafter referred to in this section as the transferor 31 enterprise) to another enterprise (hereafter in this section referred Explanation.—For the purposes of this clause, “domestic satellite” means a satellite owned and operated by an Indian company for providing telecommunication service; (iii) any undertaking which develops, develops and operates or maintains and operates an industrial park notified by the Central Government in accordance with the scheme framed and notified by that Government for the period beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2002 : Provided that in a case where an undertaking develops an industrial park on or after the 1st day of April, 1999 and transfers the operation and maintenance of such industrial park to another undertaking (hereafter in this section referred to as the transferee undertaking) the 32 deduction under subsection (1), shall be allowed to such transferee undertaking for the remaining period in the ten consecutive assessment years in a manner as if the operation and maintenance were not so transferred to the transferee undertaking; (iv) an industrial undertaking which,— (a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2003; (b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2003:
Provided that the deduction under this section to an industrial undertaking under sub-clause (b) shall be allowed only in relation to the profits derived from laying of such network of new lines for transmission or distribution. Explanation.—
Sub-section (8) says that where any goods held for the purposes of the eligible business are transferred to any other business carried on by the assessee or where any goods held for the purposes of any other business carried on by the assessee are transferred to the eligible business but the consideration for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80-IA, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods as on that date.
The explanation below sub-section (8) defines the expression “market value” to mean the price that such goods or services would ordinarily fetch in the open market. Sub-section (1) says that the State Electricity Board may enter into arrangements with any person producing electricity within the State for purchase by the State Electricity Board on such terms as may be agreed upon of any surplus electricity which that person may be able to dispose of. It says that a generating company may enter into a contract for the sale of electricity generated by it with the State Electricity Board of the State in which the generating station owned or operated by the generating company is located or with any other person with the consent of the competent government.
Therefore, in terms of the provisions of Section 43A of the 1948 Act, the assessee had entered into an agreement dated 15.07.1999 with the State Electricity Board as per which, the assessee had supplied the surplus electricity to the State Electricity Board at the rate of Rs. While the assessing officer accepted the claim of the assessee for deduction under Section 80-IA, he, however, did not accept the profits and gains of the eligible business computed by the assessee on the ground that those were inflated by showing supply of power to its own industrial units for captive consumption at the rate of Rs. 2.32 per unit was the market value of electricity and on that basis, reduced the profits and gains of the assessee thereby restricting the claim of deduction of the assessee under Section 80-IA of the Act. 3.72 per unit for supplying the same electricity to its sister concern i.e., the industrial units. Thus, as per this definition, the market value of any goods would mean the price that such goods would ordinarily fetch on sale in the open market. Black’s Law Dictionary, 10 Edition, defines the expression “open market” to mean a market in which any buyer or seller may trade and in which prices and product availability are determined by free competition. A private person could set up a power generating unit having restrictions on the use of power generated and at the same time, the tariff at which the said power plant could supply surplus power to the State Electricity Board was also liable to be determined in accordance with the statutory requirements.
Therefore, the 41 surplus electricity had to be compulsorily supplied by the assessee to the State Electricity Board and in terms of Sections 43 and 43A of the 1948 Act, a contract was entered into between the assessee and the State Electricity Board for supply of the surplus electricity by the former to the latter. Thus, market value of the power supplied by the assessee to its industrial units should be computed by considering the rate at which the State Electricity Board supplied power to the consumers in the open market and not comparing it with the rate of power when sold to a supplier i.e., sold by the assessee to the State Electricity Board as this was not the rate at which an industrial consumer could have purchased power in the open market. However, such a unit would have restrictions not only on the use of the power generated but also regarding determination of tariff at which the power generating unit could supply surplus power to the 43 concerned State Electricity Board. The price at which the surplus power supplied by the assessee to the State Electricity Board was determined entirely by the State Electricity Board in terms of the statutory regulations and the contract. That being the position, we hold that the Tribunal had rightly computed the market value of electricity supplied by the captive power plants of the assessee to its industrial units after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers.
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In that case, the High Court rejected the first contention of the revenue that the assessee therein was not entitled to the benefit under Section 80-IA of the Act because the power generated was consumed at home or by other business of the assessee.
Therefore, it was held by the High Court that the assessee’s generating unit could not claim any benefit under Section 80-IA of the Act computing the profits and gains on the basis of the rate chargeable by the distribution licensee from the consumer and that the benefit could only be claimed on the basis of the rates fixed by the tariff regulatory commission for sale of electricity by the generating company.
As we have noted at the very outset, the issue is or the question raised by the revenue is whether the Tribunal could ignore compliance to the statutory provisions relating to exercise of option to adopt Written Down Value (WDV) method in place of the straight line method while computing depreciation on the assets used for power generation. This issue arises in the case of the respondent-assessee M/s Jindal Steel and Power Ltd., Hisar for the assessment year 2001- 2002.
After obtaining the clarification of the assessee, assessing officer held that since the assessee did not exercise the option of adopting WDV method, therefore, in view of the provision of Rule 5 48 (1A) of the Income Tax Rules, 1962 (briefly ‘the Rules’ hereinafter), it would be entitled to depreciation on the straight line method. On further appeal by the assessee before the Tribunal, vide the order dated 07.06.2007, the Tribunal on the basis of its previous decision in the case of the assessee itself for the assessment year 2000 answered this question in favour of the assessee. We may, therefore, refer to sub-rule (1A) along with the provisos thereto which read as under: (1A) The allowance under clause (i) of sub-section (1) of section 32 of the Act in respect of depreciation of assets acquired on or after 1st day of April, 1997 shall be calculated at the percentage specified in the second column of the Table in Appendix IA of these rules on the actual cost thereof to the assessee as are used for the purposes of the business of the assessee at any time during the previous year:
The second proviso says that the undertaking specified in clause (i) of sub-section (1) of Section 32 of the Act may instead of the depreciation specified in Appendix-IA may opt for depreciation under sub-rule (1) read with Appendix-I but such option should be exercised before the due date for furnishing the return of income under sub-section (1) of Section 139 of the Act. From a conjoint reading of Rules 5(1) and (1A) of the Rules read with Appendix-1 and Appendix-1A, it is evident that while sub- rule (1) provides for allowance of depreciation in respect of any block of assets in terms of the second column of the table in Appendix 1, sub-rule (1A) enables an assessee to seek allowance of depreciation of assets acquired on or after the 1st day of April, 1997 as per the percentage specified in the second column of the table in Appendix-1A on actual cost basis. However, the second proviso to sub-rule (1A) clarifies that an assessee may opt for depreciation under Appendix-1 instead of Appendix-1A but such option has to be exercised before the due date for furnishing the return of income under sub-section (1) of Section 139 of the Act. This Court held that if the option is exercised when the return 53 is filed, that would be treated as in conformity with the requirement of Section 11 of the Act. All that is required is that the assessee has to opt before filing of the return or at the time of filing the return that it seeks to avail the depreciation provided in Section 32 (1) under sub- rule (1) of Rule 5 read with Appendix-I instead of the depreciation specified in Appendix-1A in terms of sub-rule (1A) of Rule 5 which the assessee has done.
This brings us to the second of the additional issues which is the deletion of the addition of Rs 3,39,95,000.00 made by the assessing officer on account of payment made by the assessee to Shri SK Gupta and his group of companies. On further appeal by the revenue, Tribunal vide the order dated 29.05.2015 set aside the view taken by CIT (A).
Thereafter, he reiterated the statements made by him in the affidavit dated 05.02.2007 in a statement recorded on 08.02.2007.
Case Title: COMMISSIONER OF INCOME TAX Vs. M/S JINDAL STEEL THROUGH ITS MANAGING DIRECTOR
Case Number: C.A. No.-013771-013771 / 2015
