The Supreme Court has ruled in favour of Jindal Steel and Plant Limited observing that market value of electricity should be determined by comparing it with the open market rate for power. The Court affirmed the decisions of the tribunal and the High Court, rejecting the respondent’s contention. The argument put forth was that an assessee was not entitled to benefits under Section 80-IA of the Income Tax Act, 1961 (hereinafter referred to as the 'ITA') when power generated was consumed domestically or by other businesses. The Court emphasized the crucial factors of the absence of a contract with the State Electricity Board and reliance on rates fixed by the tariff regulatory commission.
Brief Facts of the Case:
The central issue of the appeal concerns the reassessment of the deduction under Section 80 IA of the ITA by the assessing officer, which was set aside by the Income Tax Appellate Tribunal (ITAT) and upheld by the High Courts based on the assessee's contention.
The dispute revolves around the computation of profits under Section 80 IA, particularly regarding the price per unit of electricity supplied by the assessee to the State Electricity Board and its captive plants. The assessing officer alleged inflated profits, claiming the market value should be the rate at which electricity was supplied to the State Electricity Board (Rs.2.32 per unit), not the rate charged to its industrial units (Rs.3.72 per unit).
The ITAT supported the assessee, stating the price charged to industrial units was the market value for Section 80 IA. The High Court upheld this decision, leading to the current appeals by the revenue. The assessee argues that the forced sale conditions and monopoly in the electricity market justify the rate charged to industrial units as the market value.
Contentions of the Appellant:
The appellant argued that the assessee intentionally inflated profits from electricity generation to claim higher deductions under Section 80 IA of the Act. He contended that selling power to the State Electricity Board at Rs. 2.32 per unit and to the sister concern at Rs. 3.72 per unit allowed the assessee to show higher receipts and claim higher deductions.
The appellant referred to the assessment order and asserted that the assessing officer was justified in questioning the true market value of Rs. 3.72 per unit. He argued that factors considered by the State Electricity Board, such as distribution losses and subsidies, rendered this rate inaccurate. Additionally, the appellant highlighted the voluntary nature of the agreement between the assessee and the State Electricity Board.
As per the definition of "market value" in Section 80 IA and relevant provisions of the Electricity (Supply) Act, the appellant argued that the fair market rate should be Rs. 2.32 per unit. They referred to a decision in M/s Printers House Private Limited Vs. Mst. Saiyadan[1], asserting that market value is determined by the price in the open market based on supply and demand laws.
The power purchase agreement with the State Electricity Board dictated the market value, making Rs. 2.32 per unit the appropriate rate. The rate fixed by the power purchase agreement, not the distributable licensee's rates, determined Section 80 IA benefits.
Contentions of the Respondent:
The respondent argued that the adoption of Rs. 2.32 per unit by the revenue was presumptive and that the Tribunal rightfully considered the industrial units as consumers. The power purchase agreement and the rate charged by the State Electricity Board were cited as key factors in determining the market value. The respondent contended that the contracted price could not be considered the market value, given the lack of a competitive environment.
They argued that the rate at which the State Electricity Board supplied electricity to industrial consumers was the market value, as per the explanation below the proviso to sub-section (8) of Section 80 IA. The respondent justified the Tribunal's decision, stating that in a captive contract, the State Electricity Board was the dominant partner, and the contract price did not reflect the open market value.
Observations of the Court:
The Supreme Court provided an analysis of Section 80-IA of the ITA, focusing on its provisions related to deductions for profits and gains from industrial undertakings or eligible businesses. It clarified the conditions and percentages for deductions, including the specific durations for which the deductions are applicable. The Court also highlighted the interpretation of Section 80-IA (4) (iv) concerning deductions for industrial undertakings in India involved in power generation and distribution.
The High Court had held that the market value of electricity supplied by the assessee's captive power plants to its industrial units should be construed based on the rate charged by the State Electricity Board when supplying electricity to industrial consumers in the open market, rather than comparing it with the rate at which the assessee sold power to the State Electricity Board, as the latter was determined under statutory regulations and a contractual agreement, not in a competitive environment. Therefore, the High Court upheld the Tribunal's computation of the market value, rejecting the revenue's contention. The decision favoured the assessee in determining the profits and gains for the purpose of claiming a deduction under Section 80-IA of the ITA.
Addressing the issue of the option to adopt the Written Down Value (WDV) method, the Court clarified that there is no statutory requirement for a specific mode of exercise before the due date. It cited a relevant precedent in support of the view that exercising the option when filing the return is sufficient.
Regarding the deletion of an addition made by the assessing officer for payments to Shri S.K. Gupta and his group of companies, the Court noted the reliance on retracted statements during search operations. It found the revenue unjustified in disallowing the claim of professional expenses without considering the retraction and emphasized the denial of the opportunity for cross-examination.
Finally, the Court briefly touched on the issue of whether carbon credit is a capital or revenue receipt. However, it declined to answer the question, stating that the revenue had not challenged the Tribunal's decision on this matter before the High Court.
The Decision of the Court:
The Supreme Court dismissed the appeals and held that “the rate at which the State Electricity Board supplied power to the industrial consumers has to be taken as the market value for computing deduction under Section 80 IA of the Act”.
Case Title: Commissioner of Income Tax vs. M/s Jindal Steel & Power Limited
Coram: Hon'ble Ms. Justice B. V. Nagarathna and Hon'ble Mr. Justice Ujjal Bhuyan
Case no.: Civil Appeal No. 13771 of 2015 and other connected matters
Citation: 2023 Latest Caselaw 910 SC
Advocates for the Appellant: Mr. Naveen Kumar, AOR and Ors.
Advocates for the Respondent: Ms. Kavita Jha, AOR and Ors.
Read Judgment @LatestLaws.com
[1] 1993 Latest Caselaw 435 SC
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