ORDER SHEET IN HIGH COURT AT CALCUTTA Special Jurisdiction [Income Tax] ORIGINAL SIDE ITA 426 of 2006 COMMISSIONER OF INCOME-TAX, KOLKATA-III Versus M/S. ITC LTD BEFORE: Hon'ble JUSTICE GIRISH CHANDRA GUPTA Hon'ble JUSTICE ARINDAM SINHA Date : 1st June, 2015. For Appellant: Mr. R. N. Bandhopadhyay, Adv. For Respondent : Mr. J. P. Khaitan, Sr. Adv. with Mrs. N. Banerjee (Pal) and Mr. Akhilesh Gupta, Adv. Court : subject matter of challenge in appeal is judgment and order dated 30th June, 2006 pertaining to assessment year 2002-03. facts briefly stated are that assessee is engaged, inter alia, in manufacture of paperboard. For purpose of supplying uninterrupted power to manufacturing unit, assessee installed power-generating plant. entire production of such plant was supplied to paperboard manufacturing unit. Question arose (A) whether assessee is entitled to benefit under Section 80-IA? (B) If so, whether benefit can be computed at rate at which electricity was supplied by Andhra Pradesh State Electricity Board to paperboard manufacturing unit? assessing officer held that question of any benefit being derived by assessee under Section 80 IA would not arise because assessee did not earn any profit from out of power-generating plant. He was also of opinion that assessee did not also qualify for benefit under Section 80IA. reasoning advanced by assessing officer to 2 show that assessee did not make any profit from out of power-generating plant is as follows:- Without prejudice to above discussion, market rate taken by assessee for determining revenue of claimed power undertaking is highly illogical. In original return assessee has taken average rate of power purchased by it during financial year 2001-02 but in revised return only rate charged by APSEB has been taken ignoring rate charged by APGPCL. As per Section 80IA market value in relation to any goods or services transferred by assessee to any other business means price that such goods or services would ordinarily fetch in open market. In instant case, assessee has not taken rate which would have been received by it, had it sold power to outsiders. purchase rate of power by assessee cannot be taken as market rate within meaning of Section 80IA because market value of goods is to be determined on basis of rate on which goods/services can be sold in open market. As assessee has not sold power generated by it to any outsider market rate is not available. assessee was requested to furnish rate at which power could have been sold to outsiders but assessee has not furnished same. M/s. Indian Aluminium Co. Ltd. is assessed under this Circle and it also has power undertaking in Orissa. During course of assessment proceedings for assessment year 2002-03 said company submitted that it has sold power to Grid Corporation of Orissa Ltd. at 0.77 paisa per unit. As assessee has not submitted market rate, i.e. rate at which power could have been sold to outsider, rate received by M/s. Indian Aluminium Co. Ltd. for its power undertaking can be taken as comparable market rate at which assessee could have sold same in open market. By taking market rate at 0.77 paisa per unit profit or loss of power undertaking is recomputed and it is noticed that there is loss in power undertaking considering expenses determined by assessee and consequently, no deduction u/s. 80IA is available to assessee. In appeal preferred by assessee, CIT(A) held that there was in fact profit from power-generating plant and he also held that rate at 77 paise per unit adopted by assessing officer was incorrect for following reasons:- 3 In this order, Assessing Officer has without prejudice to denying of benefit deduction u/s.80IA of Income Tax Act 1961 to appellant has observed that market rate taken by appellant for determining revenue of claimed power undertaking is highly illogical. Mentioning that appellant had not furnished rate at which power could have been sold to outsiders, Assessing Officer has drawn reference from case of Indian Aluminium Company Limited which sold power to Grid Corporation of Orissa @ Rs.0.77 unit and observed that if same was applied in case of appellant and profit or loss of Power undertaking was recomputed same would have resulted in loss to power undertaking considering expenses determined by assessee and no deduction U/s.80IA of Income Tax Act 1961 was available to appellant. appellant on other hand has pleaded that Assessing Officer s view regarding unusually low Indian Aluminium rate of Rs.0.77 per unit could not be applied to appellant s case because of special arrangements between Indian Aluminium and Orissa State Electricity Board for sale of surplus power beyond captive power consumption because of special arrangement between Indian Aluminium and Orissa State Electricity Board which assessee did not have with Andhra Pradesh State Electricity Board. Placing reliance on decision of Hon ble Supreme Court in Thiru Aruran Sugars Ltd. vs. CIT (223 ITR 432), appellant has pleaded that market price should imply price appellant would have to pay for getting power requirement from unrelated supplier at that particular place. Based on these observations appellant has pleaded that market value would have to be computed @4.45 per unit being rate at which power was supplied by Andhra Pradesh State Electricity Board. contention of appellant has been examined. perusal of records show that based on Andhra Pradesh State Electricity Board Rates total fixed charges (in nature of Demand Charges and additional Demand charges) are Rs.5,98,64,526/- and variable charges amount to Rs.56,25,94,466/- aggregating to Rs.62,24,58,992/- after taking into consideration amount of cost incurred by appellant shown at Rs.17,53,44,000/- (after rounding off), revenue generated or profit derived by said power undertaking would work out to Rs.44,71,14,992/- (i.e.Rs.62,24,58,992/- minus Rs.17,53,44,000/-). As such, deduction claimed u/s.80IA of Income Tax Act 1961 is allowed to extent of Rs.44,71,14,000/- (rounded off). This ground of appeal is partly allowed. 4 learned Tribunal has affirmed order of CIT (A). Therefore, revenue is once again before us in appeal. In so far as question as regards eligibility of assessee to claim benefit is concerned, reference may be made to sub-Section 8 of Section 80IA which reads as follows:- (8) Where any goods [or services ] held for purposes of eligible business are transferred to any other business carried on by assessee, or where any goods [ or services ] held for purposes of any other business carried on by assessee are transferred to eligible business and, in either case, consideration, if any, for such transfer as recorded in accounts of eligible business does not correspond to market value of such goods [ or services ] as on date of transfer, then, for purposes of deduction under this section, profits and gains of such eligible business shall be computed as if transfer, in either case, had been made at market value of such goods [ or services ] as on that date : Provided that where, in opinion of Assessing Officer, computation of profits and gains of eligible business in manner hereinbefore specified presents exceptional difficulties, Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. [Explanation. For purposes of this sub-section, market valaue , in relation to any goods or services, means (i) price that such goods or services would ordinarily fetch in open market; or (ii) arm s length price as defined in clause (ii) of section 92F, where transfer of such goods or services is specified domestic transaction referred to in section 92BA. aforesaid provision contemplates or does not militate against supply of electricity by eligible unit to any other business of assessee. Therefore contention that unit is not eligible because assesse has not sold power generated by power undertaking to any outsider but has consumed 100% generated by its unit does not appear to be logical. premise for claiming benefit according to Clause IV of Sub-section 4 of Section 80 IA is setting up of undertaking for generation of power during specified 5 period. fact that unit was set up within specified period is not in dispute. mere fact that power generated by undertaking was in its entirety consumed by other business of assessee does not detract from fact that demand for power to that extent was reduced and surplus to that extent could be supplied by existing distribution undertakings to public at large. object of legislature was to promote infrastructure for generating power, if instant undertaking had not been set up other business of assessee would naturally have depended for its demand in its entirety upon supply by Andhra Pradesh State Electricity Board. Shortage of power throughout country is well-known phenomenon. overall shortage of power to extent of power generated by undertaking has, therefore, been reduced. We are, as such, unable to hold that benefit under Section 80IA is not available to assessee because power generated was consumed at home or by other business of assessee. It is now well-settled that statute granting incentives for promoting growth and development should be construed liberally so as to advance objective of provision and not to frustrate it. In case of Tata Iron Steel Company Ltd. and Ors. Vs- State of Bihar reported in (1963) 48 ITR (S.C.) 123 question arose as follows:- Sections 5 and 6 of Bengal Cess Act, 1880 (as amended in Bihar), imposed local cess in case of mines and quarries on annual net profits. appellant companies which had taken on lease certain mines wherefrom they extracted ore and utilised it in their factories for manufacture of metal and products out of those metals, claimed that they could not be said to have derived annual net profits from mines when ore mined by them was not sold as such but was utilised for production of finished products which alone they sold: Held, that in order that profit might result from mining activity it was not necessary that ore won from mine should be subject of sale in same condition as it was when it came out of mine. Even if ore won was subjected to 6 processes to make finished products, there would be profit from mining activity, and there was no negation of concept of profit from mine because ore was so processed as to turn it into different commodity. There could, therefore, in law be annual profit from mines in cases where ore produced from them was not sold as ore but was utilised as raw material for manufacture of other products which were sold. Where provision like section 6 of Act brings to tax solely profit derived from single activity there has necessarily to be apportionment of profit realised by sale of end product between what is attributable to that activity and what is attributable to further processes which result in manufacture of finished product. This apportionment does not involve disintegration of business of taxpayer, and principle that person cannot trade with himself does not apply to such apportionment. Reference may also be made to judgement in case of Textile Machinery Corporation Limited Vs- CIT reported in (1977) 107 ITR 195 (SC) where question arose whether exemption under Section 15C of Income Tax Act, 1922 could be claimed by units established by assessee, major parts of whose production were consumed by existing business of assessee. Apex Court held that benefit under Section 15C was available to new businesses for reasoning given, inter alia as follows:- principal business of assessee can be carried on even if said two additional undertakings cease to function. Again, converse is also true. fact that articles produced by two undertakings are used by boiler division of assessee will not weigh against holding that these are new and separate undertakings. On other hand, fact that portion of articles produced in these two new industrial undertakings had been sold in open market to others is circumstance in favour of assessee that new industrial 7 units can function on their own. Use of articles by assessee is not decisive to deny benefit of section 15C. Reference may also be made to judgement in case of Bajaj Tempo Limited Vs- CIT reported in (1992) 62 Taxman 480 (SC) wherein following views were expressed:- section, read as whole, was provision, directed towards encouraging industrialisation by permitting assessee setting up new undertaking to claim of not paying tax to extent of six per cent in year on capital employed. But legislature took care to restrict such benefit only to those undertakings which were new in form and substance, by providing that undertaking should not be, formed in any manner provided in clause (i) of sub-section (2) of Section 15-C. Each of these requirements, namely, formation of undertaking by splitting up or reconstruction of existing business or transfer to undertaking of building, raw material or plant used in any previous business results in denial of benefit contemplated under Sub-section (1). Since provision intended for promoting economic growth has to be interpreted liberally, restriction on it, too, has to be construed so as to advance objective of section and not to frustrate it. Therefore first question as regards eligibility of assessee to claim benefit is answered in affirmative and against revenue. 8 other question which requires consideration is whether rate at which electricity was supplied by Andhra Pradesh State Electricity Board to paper board manufacturing unit could be taken into account for purpose of computing benefit under Section 80IA. benefit under Section 80IA(8) cannot obviously be computed at rate otherwise than price that electricity manufactured by assessee would have fetched in open market. Mr. Khaitan, learned Senior Advocate appearing for respondent assessee drew our attention to judgment of Apex Court in case of Thiru Arooran Sugars Ltd. Vs. C.I.T. reported in (1997) 227 ITR 432 in which Apex Court was considering question pertaining to market value in relation to sugarcanes and following views were expressed:- Held, affirming decision of High Court, that it was not disputed that asesseee utilized sugarcane grown by it in its own field for its factory and also purchased considerable amount of sugarcane from outside. Therefore, it was not case of assessee that sugarcane growers did not sell sugarcane in ordinary course of their business in region where assessee carried on business. assessee-company actually bought sugarcane from large number of growers year after year in ordinary course of business. price at which it bought sugarcane must be taken to be market price. If price was controlled by Sugarcane Control Order controlled price would be taken as market price because it was at this price that willing buyer and willing seller were expected to transact business. Mr. Khaitan also drew our attention to unreported judgment of Madras High Court in Tax Case (Appeal) Nos.68 to 70 of 2010, wherein following views were taken:- 9. Therefore, there is no difficulty in holding that captive consumption of power generated by assessee from its own power plant would enable respondent/assessee to derive profit and gains by working out cost of such consumption of power inasmuch as assessee is able to save to that extent which would certainly be covered by Section 80-IA(1). When such will be outcome out of own consumption of power generated and gained by assessee by setting up its own power plant, we do 9 not find any lack of merit in claim of respondent/Assessee when it claimed by relying upon Section 80-IA (1) of Income Tax Act by way of deduction of value of such units of power consumed by its own plant by way of profit and gains for relevant assessment years. aforesaid judgment of Madras High Court, Mr. Khaitan pointed out, is based on judgment of Apex Court in case of Bhagwan Dass Jain Vs. Union of India And Others reported in (1981) 128 ITR 315 wherein following views were taken:- Even in its ordinary economic sense, expression income includes not merely what is received or what comes in by exploiting use of property but also what one saves by using it oneself. Mr. Khaitan, therefore, submitted that rate at which electricity was purchased by paper board unit from Andhra Pradesh State Electricity Board could be taken to be market rate which was adopted by C.I.T. (Appeal) and learned Tribunal. He also drew our attention to judgment of Chhattisgarh High Court in case of C.I.T., Raipur Vs. Godawari Power & Ispat Ltd. reported in (2014) 42 taxmann.com 551 (Chhattisgarh) wherein following views were taken:- 28. Chhattisgarh-Company is company which is generating power. It is neither consumer of electricity, nor it is supplying power to consumer. It also cannot sell power to any consumer directly : it has to compulsorily sell it to Board. 29. power sold by Chhattisgarh-Company to Board is sale to company which itself supplies power to consumers. It is not sale of power to consumer. 30. Steel-Division of Assessee is consumer. CPP of Assessee supplies electricity to Steel-Division. Had Steel-Division not taken power from CPP then it had to purchase power from Board. CPP has charged same rate 10 from Steel-Division that Steel-Division had to pay to Board if power was purchased from Board. 31. market value of power supplied to Steel- Division should be computed considering rate of power to consumer in open market and it should not be compared with rate of power when it is sold to supplier as this is not rate for which consumer or Steel-Division could have purchased power in open market. rate of power to supplier is not market rate to consumer in open market. 32. In our opinion, AO committed illegality in computing market value by taking into account rate charged to supplier: it should have been compared with market value of power supplied to consumer. last point urged by Mr. Khaitan was that point as regards computation has not been raised by appellant and therefore Court should not extend scope of appeal by bringing in question not put forward in appeal. We have considered submission advanced by Mr. Khaitan but we are unable to agree with him. benefit under Section 80IA was intended to encourage business of generating power. entrepreneur who wants to avail benefit of Section 80IA cannot hope to get any benefit more than what has been contemplated by Act. It was fortuitous circumstance that entrepreneur in this case has home consumption of electricity which any other entrepreneur engaged in generation of electricity would not have. But that cannot be reason why two entrepreneurs engaged in same business will get benefit at rates computed differently. In order to avoid any such discrimination, legislature has taken care to provide that price which can be charged has to be same, which electricity would fetch in open market. It is true that at relevant point of time explanation added to sub-section 8 of Section 80 IA quoted above was not there in statute. But this fact by itself does not advance case of assessee because what was already there during relevant assessment year reads as follows:- 11 Explanation..-For purposes of this sub-section, market value , in relation to any goods or services, means price that such goods or services would ordinarily fetch in open market. Clause 2 to explanation has been added to clarify what was obvious already. assessing officer was correct in view he took that assessee can compute price of electricity sold to paper unit at market rate and for that purpose he also gave opportunity to adduce evidence to assessee. assessee did not, however, avail same and contented itself by disclosing price at which power was purchased by paper unit of assessee from Andhra Pradesh State Electricity Board. rate at which electricity was purchased from Andhra Pradesh State Electricity Board by paper unit of assessee can by no means be market rate at which power plant of assessee could have sold its production in open market. In open market buyer would obviously be distribution company or company engaged both in generation and distribution. Therefore, rate at which electricity is sold to any such company can only be market rate contemplated by section. judgment in case of Thiru Arooran Sugars Limited Vs. CIT (supra) has no manner of application for simple reason that Court in that case was concerned with question as to market value of sugarcane grown by assessee at home. Supreme Court was of opinion that sugarcane grown at home would be deemed to have been sold to sugar mill at same rate at which sugar cane was purchased by sugar mill. That obviously is correct because if sugarcane grown at home had not been sold to sugar mill of assessee itself, sugarcane would have been sold in open market. rate of sale in open market would be same at which sugarcane was purchased by sugar mill of assessee. But in case before us electricity generated by assessee could not be sold to anyone other than distribution company or company which is engaged both in generation and distribution. rate at which electricity could have been sold to any such company is not same at which such companies sale electricity to consumers. rate at which electricity can be supplied to consumer by 12 distribution licensee and rate at which generating companies can sell electricity to distribution licensee are governed respectively by Sections 61 and 62 of Electricity Act 2003. There is tariff regulatory commission which fixes both rates for sale and purchase of electricity by distribution licensee. There are provisions in Section 62 so that generating companies can recover expected revenue on basis of tariff fixed by commission. There are similarly provisions in Section 61 so that distribution licensee can derive reasonable return. There is thus in-built mechanism to ensure permissible profit both to generating companies and distribution licensees. assessee s generating unit cannot as such claim any benefit under Section 80 IA of I. T. Act computed on basis of rates chargeable by distribution licensee from consumer. benefit can only be claimed on basis of rates fixed by tariff regulation commission for sale of electricity by generating companies. Therefore, view taken both by Tribunal and C.I.T. (A) on basis of judgment of Thiru Arooran Sugars Ltd. (supra) is altogether incorrect. judgment of Chhattisgarh High Court in case of Godawari Power & Ispat Ltd. cannot be followed for same reasons. judgment of Madras High Court cited by Mr. Khaitan has no manner of application because that judgment is based on principle that money saved is money earned. principle is no doubt true but question is, which unit of assessee has saved money? Is it paper manufacturing unit which saved money? Or is it power generating unit which saved money? By installing power generating unit assessee has benefited itself by getting uninterrupted supply of power and has also benefited itself by getting electricity at lower cost which otherwise was not possible. Therefore, money was saved by paper unit and not by electricity unit. We are as such unable to agree with views rendered by Madras High Court. 13 Our attention was drawn by Mr. Khaitan to unreported judgment of this Court in case of C.I.T. Vs. Graphite India Limited, wherein assessee had computed receipts for captively consumed power at rate at which it had purchased power from board. That appeal preferred by revenue was not admitted by this Court and was dismissed at admission stage without examining of matter. Therefore, that judgment does not constitute precedent. Another judgment was drawn to our attention by Mr. Khaitan which is in case of C.I.T. Vs- Kanoria Chemicals & Industries Ltd. reported in (2013) 35 taxmann.com 566 (Calcutta) to which one of us was party (Girish Chandra Gupta, J.). That judgment was rendered on concession. Therefore, that judgment also does not constitute precedent. last submission, advanced by Mr. Khaitan that this point was not taken by appellant, has not impressed us. point is certainly involved in appeal because CIT (A) reversed finding of assessing officer that rate at which electricity was supplied by Andhra Pradesh State Electricity Board cannot be taken as market rate within meaning of Section 80IA . learned Tribunal has upheld that finding. revenue is in appeal. decision to reverse finding is based on wrong determination of substantial question of law and is therefore amenable under Sub-Section (6) of Section 260A of I. T. Act, 1961. Moreover when this Court is satisfied that case involves aforesaid question, it has corresponding duty to decide same. Reference in this regard may also be made to proviso to Sub-Section 4 of Section 260A of I. T. Act. assessee, in such case is entitled to notice that further substantial question of law is involved. Such notice has duly been given and assessee has made its submission recorded hereinabove. For aforesaid reasons second question is answered in negative and in favour of revenue. appeal is partly allowed. 14 Considering view we have taken, for ends of justice matter shall now go back to assessing officer. He shall give opportunity to assessee to adduce evidence as regards market rate at which electricity could have been sold to distribution licensee by generating company. Based on such evidence quantum of benefit under Section 80IA shall be worked in accordance with law. (GIRISH CHANDRA GUPTA, J.) (ARINDAM SINHA, J.) sm/sb. Commissioner of Income-tax, Kolkata-III v. ITC Ltd