2023 (12) TMI 417 - SC - Income Tax

Appeal allowed: assessee's captive power market value equals SEB industrial rate; WDV depreciation and consultant expense deductions sustained u/s 80IA

SC allowed the appeal in favour of the assessee on multiple points. It held market value of captive power for deduction u/s 80IA is the rate charged by ... Market value - open market - Section 80-IA(8) - computation of profits of eligible business by adopting market value/arm's length pricing - power purchase agreement / contracted price not equatable to market value - assessing officer's power to recompute profits where recorded consideration does not correspond to market value - option to adopt Written Down Value method - exercise of option before filing return - appreciation of evidence - retracted statements recorded during searchMarket value - open market - Section 80-IA(8) - computation of profits of eligible business by adopting market value/arm's length pricing - power purchase agreement / contracted price not equatable to market value - assessing officer's power to recompute profits where recorded consideration does not correspond to market value - Proper basis for computing market value of electricity for determining profits of captive power undertakings under Section 80-IA(8) and whether price paid by State Electricity Board to the captive generator is the market value. - HELD THAT: - Section 80-IA(8) requires that transfers between businesses of the assessee be valued at market value, defined as the price goods would ordinarily fetch in the open market. 'Open market' connotes an environment of free trade and competition where prices are determined by supply and demand. Where surplus power must be compulsorily sold to the State Electricity Board under statutory scheme and contractual terms, the contracted price payable by the Board to the generator is a compelled/contracted price determined in a non-competitive regulatory context and therefore cannot be equated with the market value for captive consumption. By contrast, the rate at which the distribution licensee (State Electricity Board) supplies power to industrial consumers reflects the price available to a consumer in the open market and, in the facts of these appeals, constitutes the appropriate market value for computing inter-unit transfers for Section 80-IA purposes. Applying this principle to the assessment year under consideration, the Tribunal correctly compared the captive transfer price with the rate charged by the Board to industrial consumers and accepted the assessee's adoption of that consumer-rate as market value; the High Court rightly affirmed. The revenue's reliance on the contracted sale rate to the Board as market value was rejected as contrary to the statutory definition and the factual/legal regime governing captive generation and sale under the Electricity (Supply) Act, 1948. [Paras 26, 28, 29, 30, 31]Tribunal and High Court correctly held that the market value for Section 80-IA(8) purposes is the rate at which the State Electricity Board supplies electricity to industrial consumers (the consumer rate), not the contracted price at which the captive producer sells surplus to the Board; appeals by revenue dismissed on this issue.Option to adopt Written Down Value method - exercise of option before filing return - Rule 5(1A) - proviso regarding exercise of option - Whether the Tribunal could disregard statutory formalities in relation to exercise of option to adopt WDV method in place of straight line method for computing depreciation on assets used for power generation. - HELD THAT: - Rule 5(1A) permits an undertaking to opt for depreciation under sub-rule (1) read with Appendix-I instead of Appendix-IA, provided the option is exercised before the due date for filing the return; the law does not prescribe any particular mode of exercising the option. Prior decisions of this Court establish that an option exercised at or before filing the return satisfies the statutory requirement. On the facts the assessee had claimed depreciation in accordance with Appendix-I before the due date; there is no statutory mandate for any specific formality beyond exercising the option before filing the return. The Tribunal's and High Court's conclusion that no particular mode was prescribed and that the assessee's claim met the temporal requirement of the proviso was correct. [Paras 40, 42, 43, 44, 45]Question answered for the assessee: no particular formal mode of exercising the option is required beyond doing so before filing the return; Tribunal and High Court rightly upheld allowance of WDV depreciation.Appreciation of evidence - retracted statements recorded during search - Whether the assessing officer was justified in disallowing expenditure claimed by the assessee (professional fees) solely on the basis of statements recorded during search which were subsequently retracted and whether the Tribunal correctly deleted the addition. - HELD THAT: - Assessing officer relied exclusively on initial statements recorded during search operations to disallow the claimed payments. The witness (Shri S.K. Gupta) retracted those statements by affidavit shortly thereafter and gave subsequent statements affirming that he had rendered services to the assessee. The Tribunal examined the record, accepted the retraction and subsequent statements, and found sufficient evidence to justify the payments. The assessing officer did not provide cogent reasons to disbelieve the retraction nor did the revenue afford the assessee an opportunity to cross-examine the declarant on reliance upon the retracted statement. Given the Tribunal's fact-finding exercise and absence of admissible material to sustain the disallowance, the High Court correctly found no substantial question of law and upheld deletion of the addition. [Paras 47, 49, 51, 52]Tribunal and High Court rightly deleted the addition; assessing officer's disallowance based solely on retracted search statements was not sustainable.Carbon credit - characterisation of receipts as capital or revenue - Whether receipts on sale of carbon credits are capital receipts. - HELD THAT: - The Tribunal had held that carbon credits arise from capital investment in technology and plant & machinery that reduce greenhouse gases and hence are capital in nature. However, in the appeal before the High Court the revenue did not challenge the Tribunal's finding on the nature of carbon credit receipts; consequently the High Court did not adjudicate that question. This Court observed that the revenue accepted the Tribunal's decision on carbon credits before the High Court and therefore the point was not argued below; accordingly the Court declined to decide the matter and left the question open for adjudication in appropriate proceedings. [Paras 54, 55]Question left open - Court declined to decide characterisation of carbon credit receipts and left the issue to be raised in an appropriate proceeding.Final Conclusion: All civil appeals by the revenue are dismissed. The Tribunal's and the High Courts' conclusions were upheld: (i) market value for Section 80-IA(8) purposes is the consumer-rate available in the open market (rate charged by the distribution licensee to industrial consumers) and not the contracted price payable to the captive generator; (ii) no prescribed formal mode is required to exercise the option to adopt WDV - exercising it at or before filing the return suffices; (iii) deletion of the addition based on retracted search statements was justified. The question whether carbon-credit receipts are capital is left open for determination in an appropriate forum. There shall be no order as to costs. Issues Involved:1. Recomputation of Deduction Under Section 80 IA of the Income Tax Act, 1961.2. Exercise of Option to Adopt Written Down Value Method.3. Deletion of Addition Made by the Assessing Officer on Account of Payment Made by the Assessee to Shri S.K. Gupta and His Group of Companies.4. Whether Carbon Credit is Capital or Revenue Receipt.Summary:Recomputation of Deduction Under Section 80 IA of the Income Tax Act, 1961:The core issue in these appeals was the recomputation of deduction under Section 80 IA of the Income Tax Act, 1961. The revenue's contention was that the profits of eligible business of captive power generation plants were inflated by adopting an excessive sale rate per unit for power supply to the assessee's own industrial units for captive consumption. The assessing officer had recomputed the deduction by taking the market rate as the rate at which power was supplied to the State Electricity Boards. The Tribunal and the High Courts upheld the assessee's contention that the rate at which electricity was supplied by the State Electricity Board to the industrial consumers should be considered the market value. The Supreme Court affirmed this view, holding that the rate at which the State Electricity Board supplied power to the industrial consumers should be construed as the market value for computing deduction under Section 80 IA of the Act.Exercise of Option to Adopt Written Down Value Method:The issue was whether the Tribunal could ignore compliance to the statutory provisions relating to exercise of option to adopt Written Down Value (WDV) method in place of the straight line method while computing depreciation on the assets used for power generation. The Tribunal and the High Court held that there was no requirement under the second proviso to sub-rule (1A) of Rule 5 of the Income Tax Rules, 1962, that any particular mode of computing the claim of depreciation had to be opted for before the due date of filing of the return. The Supreme Court agreed with this view, holding that the law does not mention any specific mode of exercising such an option, and the only requirement is that the option has to be exercised before filing of the return.Deletion of Addition Made by the Assessing Officer on Account of Payment Made by the Assessee to Shri S.K. Gupta and His Group of Companies:The issue was the deletion of the addition made by the assessing officer on account of payment made by the assessee to Shri S.K. Gupta and his group of companies. The Tribunal found that Shri S.K. Gupta had retracted his statement within a short time by filing an affidavit and had reiterated his stand in a subsequent statement. The High Court upheld the Tribunal's decision, finding no substantial question of law. The Supreme Court agreed, holding that there was no admissible material to deny the claim of expenditure made by the assessee.Whether Carbon Credit is Capital or Revenue Receipt:The issue was whether receipts on sale of carbon credit are capital receipts, whereafter the assessee is not liable to pay any tax. The Tribunal held that carbon credit is a capital receipt. The revenue did not challenge this decision before the High Court, and therefore, the Supreme Court declined to answer this question, leaving it open to be decided in an appropriate proceeding.Conclusion:The Supreme Court dismissed the civil appeals filed by the revenue, affirming the decisions of the High Courts and the Tribunals on all the issues involved.