TaxTMI 
TaxTMI 
2008 (11) TMI 44
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....the Act in view of Explanation (c) to Section 115JA(2)' 2. Whether Income Tax Appellate Tribunal was correct in law in reducing the amount of Rs 41.88 crores allegedly claimed by the assessee as profit from business of generation of power while computing book profit under Section 115JA of the Act' 1.2 As far as the first issue is concerned, the same is no longer res integra as it is covered by the judgment of this Court in Commissioner of Income Tax v. Eicher Ltd; 287 ITR 170 (Del), as well as, that of the Supreme Court in the case of Commissioner of Income Tax-IV, Delhi vs M/s HCL Comnet Systems and Services Ltd ; Civil Appeal No 5800 of 2008 vide judgment dated 23.09.2008. In respect of the second issue, we have framed a question of law, by our order dated 03.10. 2008. The question of law framed by us is as follows:- 'Whether the Income Tax Appellate Tribunal was correct in law in allowing the assessee's claim of alleged profits derived by the assessee from the business of generation of power while computing the book profits under Section 115JA of the Income Tax Act, 1961, particularly when the electricity power generated was entirely for captive consumption'' 1.3 In order to....
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....bsp; Bharuch 18 MW (-) 3,49,63,135/- Total profit from generation of power 41,88,50,862/- 1.6 The assessee, however, for the purposes of provisions of Section 115JA of the Act based on its books of accounts, disclosed income in the sum of Rs 86,33,382/-. By an intimation dated 07.07.1998, the Revenue processed the return filed by the assessee under the provisions of Section 143(1)(a) of the Act. On 30.3.1999, the assessee filed revised return declaring a loss of Rs 39,36,71,056/-. Interestingly though, for the purposes of Section 115JA of the Act, the assessee continued to show its income as Rs 86,33,382/-. The case of the assessee was taken up by the Assessing Officer for scrutiny. A notice under Section 143(2) of the Act was issued. During the course of scrutiny, the Assessing Officer raised a query with regard to the deduction of a sum of Rs 41,88,50,862/- from book profit by the assessee while, computing tax under Section 115JA of the Act. In response to the query of the Assessing Officer, the assessee informed that the said amount has been reduced from the book profit as this amount was profit derived from CPPs set up by the assessee with the permission of the R....
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.... permitted him to earn a return of 12% on his net worth after taking into account the cost of raw material and capital employed, which included both the fixed and variable cost. From this it was concluded that as the assessee had received a subsidy from the Government of India for manufacture of urea and, as was, apparent from the balance sheet and profit and loss account filed by the assessee, the CPPs, were a part of the fertilizer, cement, and caustic soda plants. The CPPs were included in the aforesaid plants and thus, it could not be said that the income derived from the said plants, keeping in view the subsidy received by the assessee under the Retention Price Scheme, was in any way, income derived from generation of power and; (v) lastly, the assessee is not in the business of generation of power and that the assessee is not deriving any income from business of generation of power. A distinction was drawn between an industrial undertaking generating power and one which was in the business of generating power. The assessee's case was likened to an undertaking which is generating power but is not in the business of generating power, and hence, not deriving income from generat....
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.....2001. The CIT(A) observed that the Assessing Officer in the remand report only offered general comments and said nothing which would indicate as to why that the computation filed by the assessee which was duly authenticated by the auditors ought to be rejected. 4.2 It is in these circumstances, that the CIT(A) came to the conclusion that he was satisfied that the computation certified by the auditors had been made on a proper basis, and that, at any rate allowing any further opportunity to the Assessing Officer would be a travesty of the law of limitation and, more importantly, result in reopening of the assessment by the back door through the mode of re-examination of the computation. 5. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal to the Tribunal. The Tribunal sustained the finding returned by the CIT(A) in totality. The Tribunal in brief observed as follows:- (i) that the assessee had, in note No.16 appended to the return, given the details with regard to the CPPs and the basis for arriving at the total profit of Rs 41,88,50,862/-. It further noted that the profit figure was computed on the basis of transfer of power by the CPPs to the urea, caustic ....
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....PPs to assessee's company less the cost of generation of electricity, would not have been excluded from the book profit for the purposes of Section 115JA of the Income Tax Act, but extra cost would have been incurred on account of difference between the rates charged by the State Electricity Boards and the rates adopted by the assessee for computation of profits; (v) the business of generation of power by the assessee was carried out through fully independent units which were identifiable industrial undertakings and, therefore, profits earned from these undertakings would qualify for determination of book profits for the purposes of Section 115JA of the Income Tax Act. In this case it was possible to ascertain the profits from generation and supply of power by the CPPs to other units of the assessee and this method has been examined by the auditors. It concurred with the view of the CIT(A) that the term 'business' appearing in Clause (iv) of the explanation to Section 115JA cannot be given the meaning ascribed to it by the Assessing Officer, which is that, the assessee was in the business of deriving income from a fertilizer plant as, the main business of the assessee was to manuf....
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....the said submission various factors, as pointed out by the Assessing Officer, have been brought to our notice including the reference to the Memorandum of Association, the letters of sanction issued by RSEB and GSEB, as also, the fact that the price computed by the assessee was a notional amount which resulted in notional profit and not a real profit. It was also submitted that, since no method for computation has been provided either in the Act or in the Rules, therefore the deduction ought not to be made available to the assessee. The judgment of the Supreme Court in the case of Tata Iron and Steel Ltd. v. State of Bihar 48 ITR 123(SC) was sought to be distinguished and reliance was placed on the earlier judgment of Supreme Court in the case of Kikabhai Premchand v.CIT (1953) 24 ITR 506. 6.1 As against this, the learned counsel for the assessee relied upon the orders passed by the CIT(A) and the Tribunal. It was submitted on behalf of the assessee that both the CIT(A) and the Tribunal had returned a finding of fact which ought not to be interfered with except in the event the same was found to be perverse. It was submitted that none of the findings returned by the CIT(A) and the....
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..... Shorn of details, there was an imposition of cess on Tata Iron and Steel Ltd under Sections 5 and 6 of Bengal Cess Act, 1880, in respect of, iron ore extracted from its mines, which was, utilized for manufacture of iron, as stated above, in its own factory at Jamshedpur. Tata Iron and Steel Ltd objected to the levy of cess on the ground that it had not sold the ore and, therefore, it could not be treated as having 'made any profit from the mines' within the meaning of the provisions of the Bengal Cess Act, 1880. This issue was debated right upto the Supreme Court. The Supreme Court in its judgment noted that the question raised for decision before it was whether the appellants before it, which included, Tata Iron andSteel Company Ltd derived annual net profit from the mines when the ore was not sold as such, but was utilized for production of finished products which were finally sold by the appellants in the said case. 8.2 In answering the said question the appellants in the said case, who were represented by the then Attorney General submitted before the Supreme Court that, in order that a person may derive 'profit' from a mine, the mine must be worked and the ore ....
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.... or if he does something for himself instead of employing somebody to do it. He saves money in those circumstances, but he does not make a profit.' 8.4 The Attorney General also referred to Ostime v. Pontypridd and Rhondda Joint Water Board: (1946) 28 Tax Cas. 261 and to the speech of Viscount Simon of the House of Lords : 'The identity of the source with the recipient prevents any question of profits arising.' 8.5 The Attorney General then invited the court's attention to the judgment of its own court in the case of Kikabhai Premchand (supra) and submitted that the principles enunciated in the case referred to above had been accepted by the Supreme Court. In the context of the said submission the Supreme Court, firstly, observed as follows: 'It is not necessary to examine the scope of the maxim that a person cannot make a profit out of himself or ascertain whether the principle is subject to any exceptions. It might here be pointed out that it has been held by the House of Lords in Sharkey v. Wernher that the general proposition that no one could trade with himself and make in its true sense or meaning taxable profits by dealing with himself is not universally true and that th....
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....wise make a profit out of it. He can consume it, or give it away, or just let it rot'.. How can he be said to have made an income personally or his business a profit because he uses ten bags out of his godown for a feast for the marriage of his daughter'' It would be seen from the above that the stock withdrawn was not the subject of any commercial transaction but was, so to speak, lost to the business. But that is not the position here. Though the mined ore was not itself the subject of a sale, it was converted into a commodity which was the subject of a sale.' 9. After analyzing the true scope and the effect of the principles established in Kikabhai's case it came to the conclusion that as long as there is no dissipation of the intermediary or in the sense of consumption like in the example given by Bose J. (as he then was) in Kikabhai's case where an agriculturist's stock-in-trade is consumed by his own family, the profit from mining operation and the winning of the mineral is imbedded in the profit realized from the sale of the end product. It rejected the submission made on behalf of Tata Iron and Steel Ltd that the 'profit' was not 'real' or was 'notional' based on the rati....
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....rinciple that a person cannot trade with himself, but the one far removed from it, viz., whether when a profit has been made as a conjoint result of different but integrated operations, the profits so desired could be broken up so as to permit the attribution of specific amounts of profit to each or any of the several operation or activities.' 9.1 The court also made a reference to the fact that profits from sale of end product which are brought to tax can be divided into broad groups. The first would comprise those where the entirety of the profit is liable to tax, i.e. without the elimination of income, profits, etc., derived at any earlier intermediate stage. The other group would comprise of those in which there is either non-liability or a specific exemption of the 'income, profits and gains' accruing up to a defined stage. The court held that in the latter case the principle of apportionment resting on the disintegration of the ultimate profit would apply. 10. Based on the ratio of the Supreme Court in Tata Iron and Steel Ltd it is clear that in arriving at an amount that is to be deducted from book profits ' which is really to the benefit of the assessee as it reduce....
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....ther the assessee is in the business of generation of power. Based on the findings returned both by the CIT(A), as well as, the Tribunal, it cannot be said that the assessee is not engaged in the business. As rightly held by the Tribunal, the assessee had been authorised by the State Electricity Boards to generate electricity. The generation of electricity has been undertaken by the assessee by setting up a fully independent and identifiable industrial undertaking. These undertakings have separate and independent infrastructures, which are, managed independently and whose accounts are prepared and maintained separately and subjected to audit. The term 'business' which prefixes generation of power in Clause (iv) of the Explanation to Section 115JA is not limited to one which is prosecuted only by engaging with an outside third party. The meaning of the word 'business' as defined in Section 2(b) of the Act includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The definition of 'business', which is inclusive, clearly brings within its ambit the activity undertaken by the assessee, which is, captive generation of ....