Section 80-IA, 80HHC and MAT computation: captive power tariff, export profits and capital subsidy treatment clarified.

Transfer price of captively consumed power for Section 80-IA was to be taken at the consumer tariff charged by the State Electricity Board, including electricity duty, and not at a reduced surplus-sale rate. Section 80-IA deduction did not require a reduction of profits when computing Section 80HHC benefits, and for MAT under Section 115JB the full profits eligible under Section 80HHC(3) could be excluded, without importing the phased restriction in Section 80HHC(1B). Sales tax remission for expansion in a backward area was treated as a capital receipt under the purpose test and, accordingly, was not includible in book profit under Section 115JB.

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Issues: (i) Whether the transfer price of captively consumed power for deduction under Section 80-IA had to be computed without excluding the electricity duty component; (ii) whether deduction allowed under Section 80-IA was required to be reduced while computing profits eligible for deduction under Section 80HHC; (iii) whether, while computing book profit under Section 115JB, only 80% of the profit computed under Section 80HHC(3) could be excluded instead of 100%; (iv) whether sales tax remission granted for expansion in a backward area was capital or revenue in nature; and (v) whether the sales tax incentive could be excluded while computing book profit under Section 115JB.

Issue (i): Whether the transfer price of captively consumed power for deduction under Section 80-IA had to be computed without excluding the electricity duty component.

Analysis: The applicable market value for power transferred to the assessee's captive units was held to be the rate at which the State Electricity Board supplied power to industrial consumers in the open market. The electricity duty formed part of that consumer tariff and could not be carved out while quantifying deduction under Section 80-IA. The Tribunal's approach was consistent with the settled rule that market value is to be taken as the consumer-side tariff and not the lower surplus-sale rate.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether deduction allowed under Section 80-IA was required to be reduced while computing profits eligible for deduction under Section 80HHC.

Analysis: The profits eligible for deduction under Section 80HHC were held not to suffer any reduction merely because deduction had been allowed under Section 80-IA. The two provisions operate on their own fields, and the computation of export profits for Section 80HHC does not require a diminution of business profits on account of Section 80-IA deduction.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (iii): Whether, while computing book profit under Section 115JB, only 80% of the profit computed under Section 80HHC(3) could be excluded instead of 100%.

Analysis: The exclusion under Explanation (iv) to Section 115JB(2) was held to extend to the full profits eligible for deduction under Section 80HHC(3), subject to satisfaction of the statutory conditions. The phased restriction contained in Section 80HHC(1B) was not imported into the MAT computation under Section 115JB, which is a self-contained code for book profits.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (iv): Whether sales tax remission granted for expansion in a backward area was capital or revenue in nature.

Analysis: Applying the purpose test, the subsidy was held to be linked to the setting up or expansion of industrial units in a backward area and, on the facts, retained the character of a capital receipt rather than revenue income. Its object was to promote industrial investment and not to meet operational expenses.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (v): Whether the sales tax incentive could be excluded while computing book profit under Section 115JB.

Analysis: Since the incentive was treated as a capital receipt and not as income within the meaning of Section 2(24) as applicable to the relevant year, it was not liable to be included in book profit under Section 115JB. The mode of grant of the subsidy did not alter its capital character.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The appeal succeeded in full, and the assessee obtained relief on all substantial questions of law.

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