Commissioner of Income Tax V. M/s.Gowthami Solvent Oilds Ltd

ITTA/492/2012

AI Insights

The case revolves around the dispute concerning the deduction claimed under Section 80 IA of the Income Tax Act by a company engaged in solvent extraction and power generation. Initially, the company claimed a deduction of Rs.25,77,876 in its return for the assessment year 2001-02, which was later revised to Rs.47,09,093. The assessing officer allowed a reduced deduction, leading to appeals at various levels, including the CIT (Appeals) and the Income Tax Appellate Tribunal. The core issue was the correct valuation method for electricity used in captive consumption for which the Tribunal ultimately decided in favor of the respondent, supporting the market value approach for the electricity used.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 734687 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 10-12-2012
• Assessment Year: misc
• Other Referred Cases: WEST COAST PAPER MILLS LTD v. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: S R ASHOK
• Keywords: Captive consumption; Deduction; Income Tax; Market value; Power generation
• Section: 80-IA; 80-IA; 80-IA(8); 80-IA(5); 260-A

Judgement Text

"THE HON’BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE M.S. RAMACHANDRA RAO ITTA No.492 of 2012 Order : ( per Sri MSR, J ) This appeal is filed by the Revenue under Section 260-A of the Income Tax Act, 1961 ( for short “the Act”) challenging the order dated 21.11.2008 in ITA No.447/Vizag/2004 of the Income Tax Appellate Tribunal, Visakhapatnam Bench, Visakhapatnam. The respondent is a company incorporated under the Companies Act, 1956 engaged in the business of Solvent Extraction. It also has an undertaking producing electricity. The respondent filed its return of income for the assessment year 2001-02 on 25.10.2001 admitting a net income of Rs.1,15,42,445/-. In this return, the respondent claimed deduction of Rs.25,77,876/- under Section 80-IA of the Act in respect of its power generation plant. This claim was supported by audit report in Form No.10 CCB and working as per annexure duly counter signed by the Chartered Accountant. It worked out the profits of its power generation plant and claimed the said deduction under Section 80 IA at 30% of the net profits. It was taken up for scrutiny with the approval of the Commissioner of Income Tax, Rajahmundry. On 18.10.2002, the respondent filed a revised return admitting a net income of Rs.94,11,230/-. In this return, the respondent claimed a higher deduction of Rs.47,09,093/- under Section 80 IA of the Act on the basis of a note accompanying the revised return which stated that the higher deduction should be allowed in view of sub section (5) of Section 80 IA read with sub section (8) of Section 80 (IA). By his order dated 19.3.2004, the assessing officer allowed deduction under Section 80 IA of the Act only to the extent of Rs.23,38,344/- on the ground that the assessee had wrongly followed “raw material consumption ratio” basis; that it ought to have followed the “sales ratio” basis for working out the admissible deduction under Section 80 IA of the Act; that the captive consumption of steam is to be valued at market price; that the cost of steam transferred to the power plant has to be adopted at cost price; that the variation in the cost price and market price of steam transferred to power plant compensates the variation in the “cost price” and “market price” of captive power consumption. The respondent filed an appeal to CIT ( Appeals ), Rajahmundry contending that the assessing officer ought to have allowed the deduction under Section 80 IA of the Act as claimed by the respondent and ought not to have reduced it to Rs.23,38,344/-. The respondent contended that the assessing officer erred in law and facts of the case in holding that the captive consumption of steam is to be valued at market price. The appeal was allowed on 21.5.2004 by the appellate authority holding that under Section 80 IA of the Act, the profits and gains of eligible business shall be computed as if the transfer had been made at the market value of such goods or services as on the date of transfer; that in the revised return of income, the respondent had claimed the value of power used for captive purpose (own business) i.e. the solvent oil extraction plant; that the respondent is only selling the power generated and that the steam generated is not tradable or marketable and therefore has no realizable value; that only power can be valued at market price as provided in sub- section (8) of Section 80 IA of the Act; that the respondent is not selling its steam to any outside agency; that infact the boiler is part of co-generation plant, wherein the steam at high pressure and temperature is produced and transferred completely to a steam turbo alternator in the power plant to produce power and to throw process steam at desired pressure at an intermediate stage; and that in case the steam is not required for captive use (own business), the entire steam produced is used for power generation. He therefore held that the action of the respondent in claiming the value of power at market price as per the provisions of Section 80 IA of the Act is valid and the assessing officer has to allow the respondent’s claim as per its revised return. Challenging the said order, the Revenue filed appeal ITA N o.447/Vizag/2004 to the Income Tax Appellate Tribunal, Visakhapatnam Bench, Visakhapatnam. By order dated 21.11.2008, the Tribunal dismissed the appeal holding that the issue regarding the valuation of electricity which was used for own purposes has been decided in favour of the respondent in the decision of the ITAT, Mumbai “I” Bench in the case of WEST COAST PAPER MILLS LTD v. ACIT[1]; that the CIT(Appeals) had rightly decided with regard to adoption of market rate for the electricity consumed for own purposes; that with regard to the expenses allocated for the purpose of arriving at the profit from power generation, the assessee was consistently following the “raw material consumption” basis and that they are not selling expenses but administrative expenses and the assessing officer did not attribute any special circumstances that necessitated the reworking of the basis. Challenging the same, the Revenue has filed the present appeal. Heard Sri S.R. Ashok, learned Senior Standing Counsel for the Revenue. Sri S.R.Ashok contended that the Tribunal was not justified in confirming the order of the CIT(Appeals) in accepting the claim for deduction of Rs.47,09,093/- made by the assessee for deduction under Section 80 IA of the Act and ought to have reduced it to Rs.25,77,876/-; that it ought to have noticed that the initial claim for deduction by the assessee of Rs.25,77,876/- made by the assessee was on the basis of books of accounts approved by the General Body of the assessee and audited under Section 44 AB of the Act; that the Tribunal is not justified in proceeding on the assumption that market value principle adopted for finished products contemplated under Section 80 IA (8) of the Act is absolute in spite of the proviso thereto conferring discretion on the assessing officer to adopt any other reasonable basis for such deduction. We are not persuaded by the above submissions. Section 80 IA of the Act to the extent relevant as it stood at the relevant time ( assessment year 2001-02) is as follows : “ Section 80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development etc : - (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100% of profits and gains derived from such business for 10 consecutive assessment years. (2) ….. …. (8) Where any goods held for the purposes of 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 and, in either case, the consideration, if any, 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 the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date: Provided that where, in the opinion of the assessing officer, the computation of the profits and gains of the eligible business in the manner herein before specified presents exceptional difficulties, the assessing officer may compute such profits and gains on such reasonable basis as he may deem fit ” A reading of the above section shows that it is part of a scheme incorporated in the Act which provides for incentives in the form of tax deductions essentially belonging to the category of “profit linked incentives”. In the present case, the assessee is engaged in the business of manufacture and trading in solvents, refinery and hydrogenation, vanaspati oils and power generation and sale of the same. Although in its initial return filed on 25.10.2001, the respondent claimed a deduction under section 80 IA of only Rs.25,77,876/-, in the revised return filed by it on 18.10.2002, it claimed a higher deduction of Rs.47,09,093/-. It contended that the higher deduction should be allowed and that the value of power used for captive purpose (own business) i.e. solvent oil extraction plant should also be taken into account. In the original return, the cost of captive consumption was adopted at Rs.1.4994724 per unit while in the revised return, the value of captive consumption was adopted at Rs.3.9768 per unit. But the assessing officer while accepting that it has to be valued at market price, was of the view that even the value of the steam that has been transferred to own business has to be valued at market price, in which case, it compensates the variation if any, in the cost price and market price of captive power consumption. He therefore rejected the respondent’s claim for deduction under Section 80 IA of the Act as per the revised return. In our view, this was rightly reversed by the CIT (Appeals) as the respondent was only selling the power generated but the steam generated was not tradable or marketable and has no realizable value. The steam is produced at high pressure and temperature in the boiler which is part of co-generation plant and is transferred completely to a steam turbo alternator in the power plant to produce power or to throw process steam at desired pressure at an intermediate stage. Where the steam is not required for captive use i.e. solvent oil extraction plant, it is used for power generation. Therefore, only power can be valued at market price as provided in sub section (8) of Section 80 IA. I n West Coast Paper Mills Ltd.v. Asst.Commissioner of Income Tax, the ITAT, Mumbai ( 1 supra) , the assessee was a limited company engaged in the manufacture and sale of paper and paperboards, multi layer boards, etc. and it had set up four DG sets for the purpose of generation of power, which were used to meet the requirement of power in the unit manufacturing paper. The assessee claimed deduction under section 80-IA in respect of profits and gains from business of generation and distribution of power. These power units were mainly in the nature of captive power units catering to the requirements of the paper plant. The AO took the stand that the assessee is not at all entitled for any deduction under section 80-IA in respect of these power units. To be more specific, the AO opined that the assessee has a paper manufacturing unit and it needed continuous power supply for manufacturing paper. Assessee's requirement of power is fulfilled by in-house generation from these power units. No revenue is generated by transfer of power by the power unit to the paper unit and there is, no sale of power. This is only an inter division transfer. The AO ultimately denied the deduction holding that the assessee is not doing the business of power generation as it has not sold to any outside parties. Thus, no revenue is brought to the unit. The CIT(A) however allowed deduction computing profits derived from the DG sets units directing the AO to examine the electricity bills of State Electricity Boards which were issued to the assessee by the Board on which the assessee has based its working of the transfer price and recalculate the price to be adopted after excluding elements of tax or levy which may form part of the total amount billed. After excluding such amount, the price per unit of power would be determined and the same should be adopted as the transfer price of the power generated by the assessee's power DG Units. However, 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 depending on the capacity of the unit. The Tribunal held that the computation of the profit derived from generation and distribution as worked out by the assessee could not be accepted and that the computation made by the CIT(A) was correct. In our view, the Tribunal, while passing the impugned order in the present case, rightly followed the above decision regarding the valuation of electricity used by the respondent for its own purposes. We agree with the Tribunal that the respondent had been consistently following the “raw material consumption” basis for allocating certain expenses between power generation plant and other plants since inception and not the “sales ratio method” and there was no necessity to disturb the same. We are of the opinion that no substantial question of law arises for consideration in this appeal. Accordingly, the appeal is without any merit and is dismissed. No costs. JUSTICE GODA RAGHURAM JUSTICE M.S. RAMACHANDRA RAO Dt: 10-12-2012 kk THE HON’BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE M.S. RAMACHANDRA RAO ITTA No.492 of 2012 Date : 10-12-2012 [1] (2006) 103 ITD 19 (Mumbai); "