2013 (10) TMI 5 - HC - Income Tax

Market value of captive power transferred to own factory for s.80-IA deduction: open-market consumer rate upheld, disallowance set aside.

For deduction under s. 80-IA, the dominant issue was the determination of 'market value' under s. 80-IA(8) for electricity transferred by a captive power ... Deduction u/s 80IA of the Income Tax Act - Whether the 'market value', as specified in Section [80-IA (8)] of the Act would be the same as the 'sale price' of the State Electricity Board when the assessee did not incur any transmission loss or administrative or any other charges which the State Electricity Board has to incur for the same - The Assessee manufactures iron and steel. It has established a Captive Power Plant(CPP) to supply electricity to its manufacturing unit. The excess power is sold to the Chhattisgarh State Electricity Board - AO computed the market value of the power supplied to the Steel-Division and disallowed the difference between the market value claimed by the Assessee and the market value assessed by him – Held that:- CPP of the Assessee qualifies for claiming deductions under this sub-section 80-IA (4) (iv) of the Act - Sub-section (8) of section 80-IA {80-IA (8)} of the Act provides that for the purposes of deduction under this section profits and gains of eligible business are to be computed as if the transfer was done on the market value on that date - The proviso to section 80-IA (8) of the Act requires the AO to compute the profits and gains in the manner already proved. And in case the manner presents exceptional difficulties then the AO is empowered to compute profits and gains on such reasonable basis as he may deem fit. The market value of the power supplied to the Steel-Division should be computed considering the rate of power to a consumer in the open market and it should not be compared with the rate of power when it is sold to a supplier as this is not the rate for which a consumer or the Steel- Division could have purchased power in the open market. The rate of power to a supplier is not the market rate to a consumer in the open market - AO committed an illegality in computing the market value by taking into account the rate charged to a supplier: it should have been compared with the market value of power supplied to a consumer - Decided against the Revenue. Issues involved:Interpretation of sub-section (8) of section 80-IA of the Income Tax Act, 1961 in relation to the market value of power supplied by an undertaking, determination of market value for the purpose of deduction under section 80-IA, comparison of market value with sale price of the State Electricity Board, consideration of relevant factors in computing market value.Analysis:1. Interpretation of sub-section (8) of section 80-IA:The case involved a dispute regarding the interpretation of sub-section (8) of section 80-IA of the Income Tax Act, 1961. This sub-section pertains to the computation of profits and gains of an eligible business based on the market value of goods or services transferred between different businesses carried out by the assessee. The proviso empowers the Assessing Officer to compute profits and gains on a reasonable basis if the prescribed method presents exceptional difficulties.2. Determination of market value for deduction under section 80-IA:The central issue revolved around the determination of the market value of power supplied by an undertaking, specifically a Captive Power Plant, to its manufacturing unit. The market value is crucial for computing profits and gains eligible for deduction under section 80-IA. The explanation to the sub-section defines 'market value' as the price that goods or services would fetch in the open market.3. Comparison of market value with sale price of the State Electricity Board:The crux of the matter was whether the market value of power supplied by the undertaking should be equated with the sale price charged by the State Electricity Board. The contention arose due to differing rates charged by the Board and the undertaking. The dispute centered on whether the Board's price, which includes additional charges like wheeling and transmission, should be considered while computing the market value.4. Consideration of relevant factors in computing market value:The court analyzed the relevant factors in computing the market value of power supplied by the undertaking. It emphasized that the market value should reflect the price at which a consumer could purchase power in the open market. The comparison was made between the rate charged to consumers in the open market and the rate charged to a supplier like the State Electricity Board.5. Judicial Decision - Market value equated with sale price of the Board:The High Court held that the market value of power supplied by the undertaking should be determined based on the rate at which power is sold to consumers in the open market. The court rejected the Assessing Officer's computation based on the Board's price, emphasizing that the market value should align with the consumer rate. The decision favored the Assessee, dismissing the tax appeals by the Department.In conclusion, the judgment clarified the interpretation of section 80-IA(8) regarding the computation of profits and gains based on market value. It underscored the importance of considering the actual consumer rate in determining the market value of goods or services for deduction purposes under the Income Tax Act.