2010 (1) TMI 1175 - AT - Income Tax

Tribunal decision: Mixed outcome on tax appeals for multiple assessment years

The Tribunal partly allowed the appeal for Assessment Year 2002-03, and for Assessment Years 2003-04 and 2004-05, the appeals were partly allowed and ... Deduction under section 80IA for captive power plant - treatment of interest on margin money deposited for opening Letter of Credit - netting of interest income and interest expenditure - set-off of inter-unit losses against profits for computing deduction under Chapter VI-A - market value of electricity for intra-enterprise supplyDeduction under section 80IA for captive power plant - treatment of interest on margin money deposited for opening Letter of Credit - Interest earned on margin money deposited with bank for opening Letters of Credit is part of business receipts and eligible for deduction under section 80IA of the Act (as applied to the CPP unit) for AY 2002-03. - HELD THAT: - Following the Tribunal's earlier analysis and authorities which distinguish Pandian Chemicals and apply the ratio in Karnal Co-operative Sugar Mills Ltd., interest earned on margin money deposited for opening LCs (where the LC relates to import of raw materials to be consumed in the business) is incidental to acquisition of trading/raw material and falls within 'profits and gains derived by an undertaking or an enterprise from any business' for the purposes of section 80IA(4). The Tribunal respectfully followed its prior decision in ITA No.1391/Ahd/2004 and Easter Tar (P) Ltd. and held the interest to be eligible for deduction under section 80IA. [Paras 6]Allowed in favour of the assessee for AY 2002-03.Set-off of inter-unit losses against profits for computing deduction under Chapter VI-A - Losses of the general/unit (Plate Mill) are to be set off against profits of the CPP when computing gross total income; deduction under section 80IA is available only after such adjustments. - HELD THAT: - Applying the Supreme Court decision in Synco Industries Ltd. and the scheme of Chapter VI-A, the Tribunal held that gross total income must be determined after adjusting inter-head/inter-unit losses as required by section 80B(5) (and related provisions) before computing entitlement to deductions under Chapter VI-A. Consequently, the CIT(A)'s allowance of section 80IA deduction without adjusting the loss of the general unit was not permissible. The Tribunal therefore rejected the assessee's contention and upheld the order allowing set-off. [Paras 9]Assessee's ground rejected; issue decided against the assessee for AY 2002-03.Market value of electricity for intra-enterprise supply - deduction under section 80IA for captive power plant - Market value of electricity supplied by the CPP to the general unit is to be taken as the price at which the Electricity Board (GEB) supplies electricity to the assessee (inclusive of duty); the rate charged by the CPP was therefore upheld for computing deduction under section 80IA. - HELD THAT: - Relying on Tribunal precedents (including decisions referred to from Delhi and Mumbai Benches and the Tribunal's own earlier orders), the Tribunal held that the market value postulated by section 80IA(viii) should be taken as the price at which the assessee would purchase electricity from the Electricity Board. Since GEB's rate (inclusive of duty) represents the market rate, the price charged by the CPP to the general unit was held to be at market value and thus acceptable for computing the section 80IA deduction. [Paras 12]Assessee succeeds on this point for AY 2002-03.Netting of interest income and interest expenditure - treatment of interest on margin money deposited for opening Letter of Credit - For AY 2003-04 and AY 2004-05, the question of netting interest income earned on margin money against interest expenditure is remanded to the Assessing Officer for verification of nexus; onus is on the assessee to establish nexus between the interest expenditure and the interest income. - HELD THAT: - The Tribunal followed the reasoning of the Delhi High Court and its own earlier finding (in AY 2002-03) that interest on margin money for LCs can be business income; where such interest income is so treated, corresponding interest expenditure that has direct nexus with earning that interest may be netted. However, nexus and allocation between units must be verified. Consequently, the Tribunal restored the matter to the AO for determination of nexus and allowed netting if established; this direction was made for assessment years 2003-04 and 2004-05 (statistical allowance noted). [Paras 18, 21]Matter remanded to the AO for verification and computation; netting permitted if nexus is proved by the assessee (partly allowed for statistical purpose for AYs 2003-04 and 2004-05).Deduction under section 80IA for captive power plant - Ground relating to dividend allocation between units was not pressed and is rejected. - HELD THAT: - The assessee did not press its first ground (that certain dividend pertained to the general unit and not the CPP) at hearing; the Tribunal therefore rejected that ground. [Paras 4]Rejected as not pressed.Final Conclusion: The Tribunal partly allowed the appeal for AY 2002-03 by (i) allowing deduction under section 80IA in respect of interest earned on margin money for LCs and (ii) upholding the CPP's electricity price as market value, but rejected the claim to exclude general-unit losses when computing the CPP deduction. For AYs 2003-04 and 2004-05 the Tribunal remanded the question of netting interest income and interest expenditure to the Assessing Officer for verification of nexus (with the onus on the assessee) and allowed the electricity-price point consistent with the earlier year; overall the appeals were partly allowed and partly restored for computation. Issues Involved:1. Deduction under Section 80IA for Captive Power Plant (CPP).2. Interest income on margin money deposits.3. Deduction of loss in the general unit from the income derived by CPP.4. Computation of the amount of deduction under Section 80IA for CPP.5. Adjustment of electricity price charged by CPP Unit from the General Unit.Issue-wise Detailed Analysis:1. Deduction under Section 80IA for Captive Power Plant (CPP)The assessee argued that the computation of the deduction under Section 80IA for the CPP should be separate from the general unit. The CIT(A) had deducted the loss in the general unit from the income derived by the CPP, which the assessee contested. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Synco Industries Ltd. vs. Assessing Officer, which mandates that the gross total income must include all inter-head and intra-head adjustments, including losses from other units. Thus, the Tribunal rejected the assessee's claim for a separate computation of the deduction.2. Interest Income on Margin Money DepositsThe assessee claimed a deduction under Section 80IA for interest income earned on margin money deposits for obtaining Letters of Credit (LCs). The AO and CIT(A) denied this deduction, citing the Supreme Court's decision in Pandian Chemicals Ltd. vs. CIT, which held that such interest income is not derived from the industrial undertaking. However, the Tribunal reversed this decision, following its earlier ruling in favor of the assessee for Assessment Year 2001-02. The Tribunal referenced the Supreme Court's decision in CIT vs. Karnal Co-operative Sugar Mills Ltd., which allowed interest earned on deposits for LCs as incidental to the acquisition of assets. Thus, the Tribunal allowed the assessee's claim for deduction under Section 80IA for interest income on margin money deposits.3. Deduction of Loss in the General Unit from the Income Derived by CPPThe AO had reduced the loss incurred in the general unit from the income earned by the CPP unit, thereby reducing the available deduction under Section 80IA. The CIT(A) upheld this decision, referencing Section 80AB, which requires the deduction to be available on net income after adjusting losses. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in Synco Industries Ltd. vs. Assessing Officer, which mandates that the gross total income must include all adjustments, including losses from other units. Thus, the Tribunal rejected the assessee's claim.4. Computation of the Amount of Deduction under Section 80IA for CPPThe assessee argued that the computation of the deduction under Section 80IA for the CPP should not include the loss from the general unit, as the CPP was entitled to a 100% deduction while the general unit was entitled to only 30%. The Tribunal rejected this argument, following its earlier ruling for Assessment Year 2001-02, which upheld the AO's and CIT(A)'s decisions to include the loss from the general unit in the computation of the deduction for the CPP.5. Adjustment of Electricity Price Charged by CPP Unit from the General UnitThe AO had restricted the rate at which the CPP unit charged the general unit for electricity to Rs. 5.32 per unit, instead of the Rs. 5.40 per unit charged by the CPP unit. The CIT(A) upheld this adjustment, stating that the rate should exclude the electricity duty of 8 paise per unit. The Tribunal reversed this decision, following its earlier ruling in favor of the assessee for Assessment Year 2002-03 and the ITAT Delhi Bench's decision in ACIT vs. Jindal Steel & Power Ltd. The Tribunal held that the market value for electricity should be the rate at which the Gujarat Electricity Board (GEB) supplies electricity, inclusive of duty. Thus, the Tribunal allowed the assessee's claim for the higher rate of Rs. 5.40 per unit.Conclusion:- For Assessment Year 2002-03, the appeal is partly allowed.- For Assessment Years 2003-04 and 2004-05, the appeals are partly allowed and partly allowed for statistical purposes.The Tribunal's order was pronounced in the open court on 08-01-2010.