Captive power pricing, double deduction limits, and capital subsidy treatment shape tax relief under section 80-IA and book profits.

For section 80-IA valuation, captive power transfer price had to be benchmarked against the open-market tariff charged by the State Electricity Board to industrial consumers, so the embedded electricity duty could not be artificially excluded. Section 80-IA(9) barred only double deduction on the same profits and did not justify reducing independent power profits while computing section 80HHC relief; the adjustment was therefore unwarranted. Sales tax remission under the incentive scheme was held to be a capital receipt because it was intended to induce fresh investment and expansion in a backward area, and as capital receipt it could not be included in book profits under section 115JB. Relief was granted to the assessee on all issues.

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Issues: (i) Whether, for computing deduction under section 80-IA, the electricity duty component embedded in the tariff of the State Electricity Board could be excluded from the transfer price of power supplied by a captive unit; (ii) whether deduction allowed under section 80-IA could be reduced while computing profits eligible for deduction under section 80HHC; (iii) whether sales tax remission subsidy received under the incentive scheme was capital or revenue in nature; (iv) whether such sales tax remission could be included in book profits under section 115JB.

Issue (i): Whether, for computing deduction under section 80-IA, the electricity duty component embedded in the tariff of the State Electricity Board could be excluded from the transfer price of power supplied by a captive unit.

Analysis: The transfer price had to be determined with reference to the market value of electricity supplied by the State Electricity Board to industrial consumers in the open market. The tariff was a composite price and included statutory levies forming part of the actual market price. Once the open market benchmark was adopted, no artificial exclusion of the electricity duty component was permissible.

Conclusion: The exclusion of electricity duty was erroneous and the issue was answered in favour of the assessee.

Issue (ii): Whether deduction allowed under section 80-IA could be reduced while computing profits eligible for deduction under section 80HHC.

Analysis: The power undertakings and export business were distinct and independent, with separate accounts and no overlap of income. Section 80-IA(9) operates only to prevent double deduction in respect of the same profits and does not authorize reduction where the deductions arise from different sources of income. Since the power profits were not export profits, there was no question of double deduction.

Conclusion: The reduction of section 80-IA profits from section 80HHC profits was unjustified and the issue was answered in favour of the assessee.

Issue (iii): Whether sales tax remission subsidy received under the incentive scheme was capital or revenue in nature.

Analysis: The character of the subsidy depended on its purpose. The incentive scheme was designed to induce fresh capital investment and expansion of industrial capacity in a backward area. The subsidy was linked to expansion and fixed capital investment, and not to assistance in carrying on trade more profitably.

Conclusion: The subsidy was capital in nature and the issue was answered in favour of the assessee.

Issue (iv): Whether such sales tax remission could be included in book profits under section 115JB.

Analysis: Once the receipt was held to be capital in nature, it did not partake the character of income for book profit computation. Adjustments to book profit can be made only as specifically permitted by the statute, and the routing of the receipt through the profit and loss account did not alter its character.

Conclusion: The sales tax remission could not be included in book profits and the issue was answered in favour of the assessee.

Final Conclusion: The appeal succeeded on all substantial questions of law, resulting in complete relief to the assessee.

Ratio Decidendi: For section 80-IA valuation, the open-market tariff of the State Electricity Board is the proper benchmark for captive power transfer pricing, section 80-IA(9) prevents only duplication of deduction on the same profits, and subsidies granted for capital expansion are capital receipts that do not form part of book profit under section 115JB.

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