1. These two cross appeals arising out of the order dated 20^th February, 2002,(there seem to be a typographical error) of the CIT(A)-XXIII, Mumbai for the assessment year 1999-2000 were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. The major dispute in these appeals relate to the assessee's claim for deduction Under Section 80-IA of the Income-tax Act, 1961 (the Act) in respect of the Power Unit Nos. I, II, III & IV The relevant facts are that the assessee is a limited company engaged in the manufacture and sale of paper and paperboards, multi layer boards, etc. During the assessment year 1996-97, the assessee installed three windmills for power generation in the State of Tamil Nadu and set up one DG set (identified as unit No. I) for the purpose of generation of power, which was used to meet the requirement of power in the unit manufacturing paper at Dandeli in Karnataka. Similarly another DG set (identified as Unit No II) was taken on lease and operated by the assessee in the assessment year 1997-98 for the same purpose and also in the assessment year in question. In A.Y. 1999-2000, the assessee has taken on lease two more such sets (identified as unit Nos. III & IV) for the same purpose. As there was a loss from power generation from the windmill unit, no deduction Under Section 80IA has been claimed. We are not concerned with that unit at all in this appeal. As regards unit Nos. I, II, III & IV the assessee claimed deduction Under Section 80IA to the extent of Rs. 7,85,06,996. As the facts reveal, these power units were mainly in the nature of captive power units catering to the requirements of the paper plant. The Assessing Officer took the stand that the assessee is not at all entitled for any deduction Under Section 80IA in respect of these units. To be more specific, the Assessing Officer opined that the assessee has a paper manufacturing unit and it needed continuous power supply for manufacturing paper.
Assessee's requirement of power is fulfilled by in-house generation from these power units. No revenue is generated by transfer of power by the power unit to the paper unit and there is no sale of power. This is only an inter division transfer. The assessee had also claimed expenses of the power unit under the head inter division transfer to the extent of Rs. 31,48,74,253. According to the Assessing Officer, so far as windmill unit which were set up in the State of Tamil Nadu are concerned, there was generation of power and such power was sold to Tamil Nadu State Electricity Board and, therefore, income from windmills located at Tamil Nadu state are eligible for deduction Under Section 80IA in the year 1996 and since there was no positive income computed no deduction was allowed. In the year of profit also the losses of earlier year may have to be set off and only on the balance profit, if any. the deduction Under Section 80IA may be allowed. In respect of the power unit Nos. I. II, III & IV set up at Dandeli (Karnataka) are concerned, the assessee's claim is not acceptable. The Assessing Officer' s specific reasons for same are brought out here for the purpose of completeness of the issue.
I. The deduction Under Section 80IA is allowable on profit and gain derived from any business of an industrial undertaking In the instant case the assessee is generating the electricity through the power of plant unit Nos. 1. 2. 3 & 4 and the same is supplied to their paper division thus the assessee is not doing the business of power generation as it is not sold to any outside parties Thus, no revenue is brought to the unit.
II. Secondly, the power plant is only the a captive power plant installed in order to have continuous supply of power to the main plants in case of power cut. Thus, the captive power of plants are part & parcel of the main plants and therefore are the integral part of the main plant i.e. Paper plant. Assessee has not sold this power to any outside party and even to Karnataka State Electricity Board.
In fact, there is no agreement with the Karnataka State Electricity Board for purchase of power by it from the Assessee. Nor any rate has been fixed. Therefore, the Assesee's adoption of rate of which K.S.E.B. supply power to industrial users is purely notional and has no semblance of reality. Further these rates are otherwise also unrealistic as K.S.E.B is not expected to purchase power from the assessee, if at all it does at any feature date, at the same rate at which it supplies power to the industrial users. The assessee has not shown that any power has been sold to KSEB in any future year also till date.
III. That Hon'ble Calcutta High Court in the case of Universal Electrics Limited v. CIT 196 ITR 860 in which the assessee company engaged in manufacturing of electrical item and installed generator for its own purpose and claim initial depreciation Under Section 32(1)(vi) held that the assessee company was not entitled to initial depreciation Under Section 32(1)(vi). The Hon'ble Calcutta High court held as under: Section 32(1)(vi) providing for initial depreciation was introduced w.e.f April 1, 1975 It is available in respect of the following assets namely (i) New ships & new aircraft acquired by a person engaged in the business of operation of ships or aircraft after May 31, 1974, (ii) New machinery' of plant (other than office appliances or road transport vehicles) installed after May 31, 1974. For the purpose of business of generation or distribution of electricity or any other form of power (iii) Such new machinery of plant installed after May 31, 1974 for the purpose of business of construction, manufacture or production of any one or more of the articles or thing specified in item No. 1 to 24 (item Nos. 1 to 23 for the A.Y. 1975-76) of the 9lh schedule to the act and (iv) such new machinery or plant installed after May 31. 1974. In a small scale industrial undertaking (as defined) for manufacture or production of any article or thing. The conversion of mechanical power to electrical energy may have a bearing on the carrying on of the business of an assessee. But by no stretch of imagination can it be said that an assessee installing a generator to meet the exigencies of power cut is engaged in the business of generation or distribution of electricity or power. In that case all assessee would be entitled to initial depreciation on the generators installed irrespective of the nature of business carries on by them. This is not the intention Under Section 32(1)(vi).
'That admittedly the assessee was not engaged in the generation or distribution of electrical energy. It was not a licencee under the electrical act for generating electricity. The installation of generators was necessitated not because the assessee, instead of buying the energy from the sate electricity board would generate such electricity itself for its consumption. The change of mechanical power into electrical energy might have a bearing on the running of the industries but it was not an integral part or a component or ancillary of the product manufactured by the assessee.
The assessee was not engaged in the business of generating electricity and accordingly it was not entitled to initial depreciation Under Section 329(1)(vi).
IV. The Hon'ble Supreme Court in the case of CIT v. Distributors (Baroda) Pvt. Ltd. Reported in 83 ITR 377 has held that the "Business" means some real, substantial and systematic or organized course of activity of conduct with a set purpose. In the instant case the set purpose of the assessee company is to get continuous supply of power and not to generate income. Business activity or transaction necessarily implies the activity with an object to earn profit. To regard an activity as business there must be course of dealings either actually contained or contemplated to be contained with a profit motive, and not for sport or pleasure Whether a person carried on business in a particular commodity must depend upon the value, frequency, continuity and regularity of transaction of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive.
V. The Hon'ble Supreme Court in the case of Barendra Prasad Ray v. ITO 129 ITR 295 has held that the word "business" implies commercial transaction with the view of making profit and gain therefrom Therefore carrying on business connotes some substantial, systematic and organized activity with the object of making gain & profit therefore, with the inevitable control and direction qua such activity of business Consequently, the two faces of the coin of carrying on a business imply a control or direction of the business activity with a direct or indirect nexus with the profits or losses therefrom of course, subject to any express term of the contract. In the converse, it necessarily follows that if there is neither control or direction of the activity of business nor a direct nexus with its gain or profit then a person or an assessee cannot possibly be said to have carried on such a business.
VII. The profit must be derived from business activity related to industrial undertaking as held by the Hon'ble Kerala High Court in the case of CIT v. A. M. Moosa 237 ITR 867.
In the light of the same, the Assessing Officer has reached the conclusion that it cannot be said that the assessee is engaged in the business of generation of power and, hence the assessee's claim for deduction Under Section 80IA in respect of the power unit Nos. I, II, III & IV was disallowed.
3. The learned CIT(A) before whom the dispute was taken, has discussed various claims and contentions of the assessee in this regard. It was argued before the CIT(A) that all the conditions laid down for deduction Under Section 80IA are satisfied. The DG units were a new industrial undertaking involved in the business of generation of power.
There is no statutory requirement that the power so generated should be sold to outsider in order to be eligible for deduction. The power produced could be consumed by the assessee's existing units, which is borne out from the provisions of Sub-section (9) of Section 80IA which provides for a method of computation of profit in a case where any goods of an eligible industrial undertaking is transferred to any other business carried on by the assessee. The Sub-section provides that for the purpose of computing the profits of the eligible units the market value of the goods should be adopted. In this connection, reference was placed on the decision of the Supreme Court in the case of CIT v.Orient Paper Mills Ltd. 176 ITR 110 and also the decision of the Calcutta High Court in CIT v. Hindustan Motors Ltd. 127 ITR 210 and also the decision of the Supreme Court in the case of Textile Machinery Corporation Ltd. 107 ITR 195. The learned CIT(A) went on to discuss the technical details of the Unit Nos. I, II, III & IV He considered the investment involved in the installation of these Units and also took opinion of technical people and also considered the units of power generated in each of these undertakings. The CIT(A) came to the view that each of the Units is an industrial undertaking engaged in the generation of power with the aid of power and, according to him, whether a capital unit is entitled for such relief was settled by the apex court in CIT v. Orient Paper Mills Ltd. (supra) and also by the Calcutta High Court in the case of Universal Electric Ltd. 196 ITR 860.
wherein an identical issue was involved. He also relied upon the CBDT Circular No. 1116 He also considered the fact that in the assessee's own case for assessment year 1998-99 his predecessor has decided the issue in favour of the assessee. Therefore, in principle, he held that the assessee is eligible for deduction Under Section 80-IA of the Act in respect of the profit derived from the business of generation and distribution of power. Then he addressed to the issue regarding the computation of profits derived from such business of generation and distribution of power. The assessee has worked out the transfer price on the basis of estimated Karnataka State Electric Board (KSEB) rate which would be applicable for the capacity of the captive power unit In the calculation, therefore, price of power produced by the different units were different depending on the capacity of the unit. The Assessing Officer was of the view that the rate adopted by the assessee was purely notional. The learned CIT(A) asked the assessee to submit an alternative claim based on the average actual per unit cost of power purchased from KSEB by the paper division. According to the calculation, the average price for the unit of power consumed worked out to Rs. 4.74 per unit. In the profit and loss account drawn up for the power unit, sale of power to the paper division had been credited to the profit and loss account. The rate charged per unit of power had been calculated as per bills raised by KSEB. The assessee was asked to produce copies of the electricity bills received for one month on a sample basis. On examination of the bills it was found that there were certain items in these bills which are extraneous to the actual price of power such as levies and taxes, electricity duty was levied at the rate 20% on the number of units consumed and the assessee was not required to pay since the power generated is consumed in its own plant and not sold to outsider. According to him, the electricity duty collected from consumers and paid to the Government should, therefore, be reduced from the bill amount for the purpose of calculation of transfer price. The learned CIT(A) found it difficult to quantify the exact price on the basis of a small sample of electricity bill. The Assessing Officer was, therefore, directed to examine the electricity bills on which the assessee has based its working of the transfer price and recalculate the price to be adopted after excluding elements of tax or levy which may form part of the total amount billed. After excluding such amount, the price per unit of power would be determined and the same should be adopted as the transfer price of the power generated by the assessee's power D G Units Another important issue which the learned CIT(A) has addressed himself was with regard to the computation of the profits of the industrial undertaking According to him. an industrial undertaking has to be regarded as an independent business.
Therefore, the profit and loss account of the unit has to include all indirect cost s such as management remuneration, administrative overheads, etc. in proportion to the turnover or business of the Unit It was admitted by the assessee that while interest costs and other direct expenses have been debited, certain administrative overheads have not been so included. According to the profit and loss account of the assessee, the following expenses have to be proportionately debited to the profit and loss account of the power units: The assessee argued that while working out the proportionate calculation it should be kept in mind that only the amount proportionate to the electricity generated through power units I, II, III and IV should be taken into consideration. Secondly, a large part of the miscellaneous expenses did not relate to the power units and, therefore, only 50% of those expenses should be included in such calculation. The Assessing Officer was directed by the CIT(A) to determine the proportionate amount of expenses on the above heads to be allocated to the Power Units I to IV on the basis of the turnover of those units. As regards miscellaneous expenses the Assessing Officer was directed to exclude any sub-head of expenditure under the head "miscellaneous expenditure". That does not pertain to all the Power Units. A direction was given by the CIT(A) that the profit of the units should be recast after reducing the proportionate overheads. The revenue is aggrieved.
I. The Ld. CIT(A) erred in allowing the deduction Under Section 80IA to the assessee by holding that: i) The deduction Under Section 80IA is admissible to the assessee on the captive power consumption ii) The requirement of workers for each unit should be 10 or more as against 20 or more as the process of production of power from generators is run by power iii) The assessee is entitled to deduction Under Section 80IA on the leased units i.e. units No. 3 & 4 iv) The assessee is entitled to deduction on the leased units which are given on contract basis to Powerica Ltd. and Wartsilla Ltd. for the production of electricity without appreciating the fact that the assessee has not used his own workers in respect of these units v) The deduction Under Section 8)IA is allowable to the assessee on the basis of average rate of actual consumption of electricity from Karnataka Electricity Board without appreciating the fact that the assessee himself has sold electricity to Tamil Nadu Electricity Board at the rate of Rs. 2.62 per unit II The Ld. CIT(A) erred in not considering the written submissions dated 17. 2.2003 made by the Addl. CIT, Range 1(3), Mumbai on the basis of the survey action carried out at the factory' premises of the assessee on 6.2.2003 III The Ld. CIT(A) erred in allowing more deductions Under Section 80IA than claimed by the assessee in the return without referring the matter to the AO for his comments.
The assessee is also aggrieved against certain directions of the CIT(A) and its grievances is in the following grounds, so far as they relate to the determination of the income eligible for deduction Under Section 80IA of the Act.
2a. That on the facts and in the circumstances of the case, Ld CIT(Appeals) was not justified in holding that tax or levy is not be included in the computation of "Transfer Price" of power for computation of deduction Under Section 80IA in respect of power generating unit.
2b That on the facts and in the circumstances of the case. Ld.
CIT(Appeals) failed to appreciate the fact that the "Transfer Price" of power adopted by the appellant for computation of deduction Under Section 80IA in respect of power generating unit was in accordance with the provisions of the -then section 80IA(9) of the Income Tax Act, 1961.
3. That on the facts and in the circumstances of the case, Ld CIT(Appeals) erred in directing the A.O. to prorate the indirect expenses of the company in the computation of profit of the power generating unit for computation of deduction Under Section 80IA.5. The learned Departmental Representative addresses on the revenue's grievances at great length and took pain to take us through the findings of the Assessing Officer. The learned Departmental Representative promptly put us through pages 179 to 200 of the assessee's paper-book, which contain photographs of the power generating units of the assessee. The learned Departmental Representative submitted that one of the important conditions Under Section 80IA is that such unit should not be formed by transfer to a new business of machinery or plant previously used for any purpose.
Drawing our attention to these photographs, the learned Departmental Representative contended that there is lot of interlinking, interconnection and interlacing of these on several facilities required for the running of these units and, therefore, the assessee's claim for deduction Under Section 80IA of the Act needs to be examined in the light of the strict provisions of the law giving the relief. He argued that the provisions of section giving the relief should be strictly construed and should be extended only if all the conditions laid down in the section are satisfied. He has relied upon several authorities including the Bombay High Court decision in CIT v. Anil Hardboards Ltd. 207 ITR 802 and the Supreme Court decision in the case of Textile Machinery Corporation Ltd. v. CIT 107 ITR 195. Next the learned Departmental Representative pointed out that the Unit Nos. II, III & IV are not owned by the assessee but they are taken on lease and, therefore, according to him, the assessee is not entitled for any relief Under Section 80IA of the Act. For this proposiion, he relied on the Bombay High Court decision in CIT v. Harit Synthetic Fabrics Pvt.
Ltd. 162 ITR 640. The learned Departmental Representative further stressed that the assessee is not entitled to deduction on the leased units which are given on contract basis to Powerica Ltd. and Wartsilla Ltd. for the production of electricity without appreciating the fact that the assessee has not used its own workers in respect of these units. In other words, unit Nos. III & IV, apart from being taken on lease, have not been operated by the assessee but they are operated by outsiders. The learned Departmental Representative disputed the findings of the learned CIT(A). The learned Departmental Representative further pointed out that the CIT(A) erred in directing the allowance of deduction Under Section 80IA on the basis of average consumption of electricity from KSEB without appreciating the fact that the assessee itself has sold electricity to TNSEB at the rate of Rs. 2.62 per unit.
According to him. without prejudice to the main contention, deduction Under Section 80IA of the Act is directed to be allowed at a higher Transfer Price The learned Counsel for the assessee pointed out that unit No. I was owned and operated by the assessee in A.Y. 1996-97 and in that year no claim Under Section 80I of the Act was made because of the loss. In A.Y. 1997-98, unit No II was installed. The said unit was taken on lease, but operated by the assessee. In A.Y 1997-98 the assessee acquired unit No. II by taking the same on lease and operated both unit Nos. I & II and the assessee's claim for A.Y. 1997-98 for deduction Under Section 80IA has already been accepted by the Tribunal in ITA No. 382/Mum/2001 vide its order dated 21s1 June 2005. A copy of the Tribunal order is placed at pages 192 to 195 of the paper-book. In the said order the Tribunal has held that the assessee is entitled for deduction Under Section 80IA on the income imputable from the generation of power, although the said power generated from the two DG units was for captive consumption. The Tribunal was of the view that there is no fetter against the assessee using the power for self consumption The Tribunal accepted the contention of the assessee by following the decision of the Supreme Court in Textile Machinery Corporation v. CIT (107 ITR 195) and also the decision of the Bombay High Court in CIT v. Sahni Steel & Press Works Ltd. (177 ITR 344). The Tribunal also addressed itself on the issue of the price aITRibutable to the power generated and received by the assessee. The Tribunal found the answer to such question in Section 80IA(8) of the I.T. Act, 1961.
For this, the Tribunal took support from the principle laid down by the Supreme Court in the case of Thiru Arooran Sugar Ltd. v. CIT (227 ITR 437). Again, the same issue came up for consideration in A.Y. 1998-99 in ITA No. 3553/Mum/2002, wherein the Tribunal directed the Assessing Officer to grant deduction Under Section 80IA of the Act on the profits imputable to the two DG units. The learned Counsel pointed out that in the present appeals we are concerned with A.Y. 1999-2000 wherein the assessee has taken on lease two more units viz. unit Nos. III and IV and operated all the four units and claimed deduction Under Section 80IA of the Act in respect of all of them as eligible undertakings. In respect of eligibility of unit Nos I & II the learned Counsel pointed out that the issue is squarely covered in assessee's favour by the orders of the Tribunal for A. Ys. 1996-97, 1997-98 and 1998-99 and the only change in the year under consideration is that the assessee has taken on lease two more units and the operation of these units was outsourced. In other words, the assessee engaged the services of Powerica Ltd. and Wertsilla Ltd. for operation of the units on certain commercial consideration. As regards the eligibility on the leased units, the Tribunal orders in the earlier years have already extended the relief to such units so. the learned Counsel for the assessee pointed out, in a way the main grievance of the revenue in its appeal has already been decided in favour of the assessee by the earlier orders of the Tribunal cited supra. The learned Counsel for the assessee drew our attention to the several DG sets installed by the assessee to meet its increasing power demand for the paper unit, which shows that each of the unit is clearly identifiable As already found by the learned CIT(A) they are separately outsourced and there is no dispute as regards the identity of each of these separate units. They are different in the matter of capacity and in the matter of fuel consumption required for generation of power. There is no interlacing or interlinking of these units. Just because a common water pump or water storage is used to draw the water required for the units it does not loose the identity of the unit. Each of the unit stands on its own and produces the power required for captive consumption. There is no splitting up of the business already in existence. Atleast, this was not the line on which the Assessing Officer has examined the issue while he denied the deduction Under Section 80I of the Act to the assessee. The only ground was that captive consumption of power does not result in the realization of revenue. The learned Counsel further pointed out that the assessee is in the business of generation of power It has established the windmills in Tamil Nadu as a part of its business venture, so also the captive power units to meet its own requirement of power in its main manufacturing plant. In this connection, reliance was placed on the decision in CIT v. Neo Pharma Pvt Ltd. 137 ITR 879 Bom; Commissioner of Customs v. Indian Oil Corporation Ltd. and Anr. 267 ITR 272 and Collector of Central Excise v. Dhiren Chemical Industries 254 ITR 554. Drawing support from these decisions the learned Counsel for the assessee pleaded for upholding the order of the CIT(A) in so far as it relates to the ssessee's claim for deduction Under Section 80IA of the Act in respect of the unit Nos.
I. II. III and IV, which is in conformity with the decision taken by the tribunal in the earlier years in respect of the same units under identical circumstances. The learned Counsel pointed out that the assessee has employed ten or more employees in the production process of generation of power Having regard to the complicated nature of each of the unit, it was pointed out, it cannot be operated by workers or employees lesser than the limit stipulated under the statute.
6. We have carefully considered the rival submission and have gone through records, including the voluminous paper book filed by the assessee. The assesses although engaged in the manufacture and sale of paper and paperboards, multi layer boards, etc, was also into the business of power generation right from the assessment year 1996-1997.
The findings in impugned order are clearly unassailable. The assessee has from time to time right from the assessment year 1996-1997 set up four such Units to facilitate its power requirement in the paper plant at Dandeli in Karnataka State. The assessee, as the records show, made substantial capital outlays for this purpose. This only confirms that assessee was in the business of generation of power. Now the question is whether the assessee's claim for deduction Under Section 80-IA of the Act could be denied merely on the ground that these D. G. Units were catering to the captive 1 power requirement. As the Assessing Officer puts it, if the assessee has not realized any revenue by selling the power to outsiders, can the assessee be held to be entitled for deduction Under Section 80-IA of the Act9 The Assessing Officer was of the view that it is only an inter-division transfer and there was no revenue realized by it and consequently there was no derivation of profit or income in the business of industrial undertaking. The question raised by the Assessing Officer have all been answered by the Supreme Court in the case of Orient Paper Mills Ltd. 176 ITR 110 This decision of the Supreme Court does not bring out the facts. It has only affirmed the decision of the Calcutta High Court in CIT v. Orient Paper Mills Ltd. 94 ITR 73. The facts could only be found in this judgment of the Calcutta High Court. The assessee in that case owned a paper mill.
It set up a plant for the manufacture of caustic soda. an essential chemical for use in the process of manufacture of paper. The assessee obtained a separate licence for the manufacture of caustic soda and the plant was housed in a separate building. The Income Tax Officers in that case held that the caustic soda plant was ancillary to the main manufacturing unit and no part of caustic soda was sold to any outsider and therefore no relief could be claimed by the assessee Under Section 15 C of the 1922 Act. The material produced in the plant was used for captive consumption. Before the Tribunal it was contended by the revenue that the language used in Section 15 C was "profit and gain derived from an industrial undertaking". Unless the profits arose by the sale of the product of the new plant. no profit could be said to have been derived The argument was that profit should be directly derived and not indirectly or deemed to be derived. The Tribunal did not accept these submissions of the revenue and proceeded to grant the relief. The Hon'ble Calcutta High Court confirmed the order of the Tribunal and the apex Court has dismissed the appeal of the revenue by taking support from its own decision in Textile Machinery Corporation Ltd. v. CIT 107 ITR 195 and CIT v. Indian Aluminum Company Ltd. 108 ITR 367. Therefore, the stand of the Assessing Officer cannot be accepted.
Again the Calcutta High Court was faced with the same set of facts in the case of CIT v. Hindustan Motors Ltd. 127 ITR 210 The assessee in that case was engaged in the manufacture of motor cars. It established certain ancillary units. The Assessing Officer repeated his findings on the same line as he did in the case of Orient Paper Mills Ltd. (supra) and denied the relief Under Section 80 E of the 1961 Act. The Calcutta High Court held that assessee is entitled to such relief irrespective of whether the ancillaries manufactured were sold by the assessee to outsiders or were used by its for its own manufacture of cars.
Similarly, the Bombay High Court in CIT v. Sahney Steel and Press Works Ltd. 117 ITR 354, the Assessing Officer denied similar claim Under Section 80 J of the Act on the ground that the new unit was manufacturing articles to be used as raw material for the existing business of the assessee The Bombay High Court held that the fact that the new unit manufactured articles used in the existing business of the assessee was not relevant and the assessee was held to be entitled for relief Under Section 80 J of the Act. In the light of these decisions.
we are of the opinion that the claim of the assessee cannot be denied only on the ground that the DG sets manufactured the power only for the captive consumption of the assessee It may be stated that the j Tribunal in the assessment years 1997-98 and 1998-99 has already granted relief in respect of Unit Nos. I & II which were established for the purpose captive consumption. Moreover, the provision of Section 80 IA (8) itself says that where any goods or service of the eligible business are transferred to any other business carried on by the assessee and the consideration, if any, for such transfer is recorded in the accounts of. the eligible business does not correspond to the market value of such goods or services as on the date of transfer. then for the purpose of deduction under that Section. the profit and gain for such transferred business shall be computed as if the transfer has been made at market value as on that date. In other words. the provisions of Section 80 IA themselves provide an answer and give a solution were there is a captive consumption of the finished goods of the eligible units. In the light of these discussion the order of the CIT (A) granting 80 IA relief in respect of DG Units 1, II, III & IV cannot be found fault with. The other consideration that the assessee has not operated these Units by itself but got them operated through outsiders and therefore the assessee is not entitled for 80 IA relief, in our view, is not a right approach. Such consideration, in our opinion, is not a relevant consideration. Keeping in view the purpose and intent of relief Under Section 80IA, such consideration, in our opinion, is not germane from the provision of Section 80 IA of the Act.
7. That leaves us with the issue relating to the rate to be adopted for the unit of power generated and supplied to the paper division, which would impact the profit to be determined for the purpose of Section 80IA of the Act. The assessee adopted the rate at which KSEB supplied power to industrial user which the Assessing Officer considered to be purely a notional rate and has no semblance or reality. These rates, according to the Assessing Officer, were unrealistic as KSEB is not expected to purchase power from the assessee and it is also unrealistic to expect KSEB to purchase power from the assessee at a future date at the same rate on which it supplies power to the other industrial users and it is also not the fact that the assessee has sold any power to KSEB in any future year The CIT(A) asked the assessee to submit an alternative calculation based on the average actual per unit cost of power purchased from KSEB by the paper division. According to this calculation, the average price for the unit of power consumed worked out to Rs. 4.74 per unit. The assessee was asked to furnish copies of electricity bills received for one month on a sample basis. On examination of the bills, the CIT(A) directed the Assessing Officer to examine the electricity bills on which the assessee has based its working of the transfer price and recalculate the price to be adopted after excluding elements of tax or levy which may form part of the total amount billed.. After excluding such amount, the price per unit of power would be determined which would be adopted as the transfer price of the power generated by the assessee. The other important issue which the CIT(A) found that in the profit and loss account of the industrial undertaking there is no mention abut indirect costs such as managerial remuneration, administrative overheads, etc., which also needs to be considered for the purpose of arriving at the profit of the eligible Unit. On these findings, both the assessee and the revenue are aggrieved. The grievance of the revenue is that the deduction Under Section 80IA should be not be on the average rate of actual consumption of the electricity from KSEB when the assessee itself has sold electricity to TNSEB at the rate of Rs. 2.62 per unit. The assessee s grievance is that the CIT(A) was not justified in holding that the element of tax should not be included in the computation of transfer price and he also erred, according to the assessee, in directing to give a pro-rata allocation of indirect expenses of the company for the purpose of computation of the profit of the power generating Units. We have considered the submissions of the parties on this issue and are unable to find any merit in them. The Assessing Officer's adoption of the rate at which it sold the power to TNSEB cannot be accepted since the Units themselves are working at Dandeli in the State of Karnataka and the cost of generation of power in Tamil Nadu and Karnataka are different. Apart from that, the assessee has paid to KSEB for purchase of the power and the CIT(A) has correctly come to a reasonable conclusion that the transfer price should be on the basis of average price paid by the assessee during the whole year to KSEB minus certain extraneous charges such as electricity duty, etc., which is not connected with the business of the assessee. Therefore, the CIT(A) has correctly and reasonably directed the allocation of the indirect expenses for t e purpose of arriving at the income of the eligible unit and we decline to disturb such direction of the CIT(A). Accordingly, the grounds raised both by the assessee and the revenue should be taken to have been rejected.
8. The next dispute in the assessee's appeal arose on account of a newly inserted provisions of Section 145A of the Act. Section145A was inserted by the Finance (No. 2) Act, 1998 and effective from the assessment year 1999-2000, which reads as under Notwithstanding anything to the contrary contained in Section 145.
the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be- (a) in accordance with the method of accounting regularly employed by the assessee. and (b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.
Explanation:For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence of such payment.
The newly inserted provisions require all the assessees to value their inventory by including the element of tax, duty, cess or fee etc. There were two alternative methods that were prevalent upto 31.03.1999. One was known as inclusive method and the other was exclusive method. In the inclusive method, the element of tax, duty, cess or fee was always included as a element of cost. The other method known as the exclusive method prevalent upto 31.03.99 excluded the element of tax, duty, cess or fees etc. Now the legislature wants all the assesees to switch over to inclusive method from 01.04.1999 wherein the element of tax, duty, cess or fee should always be treated as a part of the cost. It is in.
this direction that the aforesaid amendment had been made by the Finance (No. 2) Act, 1998. The assessee initially adjusted the element of excise duty only to the closing stock of paper division and OFC division and computed the effect of Section 145A by claiming a deduction of Rs. 26,16,724. It appears that the assessee filed revised return wherein effect to Section 145A was given by including excise duty element on the opening stock of finished goods and modified its claim to Rs. 2,62,55,170. The assessee vide its letter dated 23.03.2002 to the Assessing Officer justified the aforesaid working which is given at pages 130 to 135 of the paper-book. The Assessing Officer disallowed the assessee's claim on the ground that the assessee shall confine the addition on account of excise duty only in respect of the stock disclosed for the assessment year under consideration without making corresponding adjustment in opening stock of the same assessment year.
The necessary disallowance was made by the Assessing Officer and the CIT(A) discussed elaborately the amendment to Section 145A of the Act and was of the opinion that the contentions of the assessee are not acceptable. According to him even when a legal fiction is created it has to be interpreted in a manner practicable. IF the contentions that the opening stock also requires revision on account of amendment to Section 145 A of the Act were to be accepted, it would mean the re-computation of the closing stock value of the earlier year, which is not the intention of the legislature. He discussed the fact that earlier proposal was to give a retrospective effect but amendment was introduced prospectively. The CIT(A) after discussing the Jurisdictional High Court decision in the case of Melmould Corporation v. CIT 202 ITR 789 and the decisions of the Supreme Court in the case of Chainrup Sampatram v. CIT 24 ITR 481 and the Karnataka High Court decision in CIT v. Corporation Bank 174 ITR 616. upheld the determination made by the Assessing Officer 9. The learned Counsel for the assessee vehemently reiterated the contentions that were taken before the revenue authorities and drew our attention to pages 130 to 146 of the paper book and also to the written submissions made before the CIT(A) appearing it page 175 of the paper book. Based upon this it was argued that the assessee has not made any adjustments to the opening stock but has considered the element of excise duty on the opening stock in the light of the principle laid down by the Bombay High Court in the case of Melmould Corporation (supra) He relied upon the Board's Circular No. 772 dated 23.12.1998 (235 ITR (st.) 35 at 73) explaining the provision and also the Guidance Note issued by the Institute of Chartered Accountants of India in respect of the same The learned Departmental Representative. on the other hand. strongly relied upon the orders of the revenue authorities.
The main contention of the revenue is that it is not open to the assessee to change the value of the closing stock of the previous year According to him, the closing stock of the earlier year which is accepted by the department should be taken as the opening stock of the year under consideration and any change as a result of the provisions of Section 145 A is only upon the closing stock. There is no ambiguity in the provisions of Section 145 A of the Act. If the contentions of the assessee were to be accepted, it will mean revaluing of the closing stock of the previous year by substituting with the element of excise duty which. according to him. is impermissible.
10. We have carefully considered the rival submissions and have gone through the record. In our view, the contentions of the revenue have some force. As already explained. the provisions of Section 145A were introduced by the Finance (No. 2) Act, 1998 with a view to end the litigation which existed prior to that. In order to ensure that the values of the opening stock and closing stock the correct value an amendment was made to provide that such values shall be determined only after considering the element of tax, duty, cess or fee paid in relation thereto. In fact, the Legislature proposed to introduce Section 145 A right from the AY. 1986-87. The aforesaid provision in a way seeks to recognize and make it compulsory to value the stock in an inclusive method as against the prevailing practice of the valuing the same by exclusive method. When the said retrospective amendment was objected very strongly by the tax payer, the amendment was made prospective in nature and was made applicable from the Assessment Year 1999-2000. As a result of this amendment, the purchases and sales as well as inventory shall always include the element of tax, duty, cess or fee paid. Therefore, in the year when the provisions are implemented for the first time, there is bound to be an impact in that year, whereas in the subsequent year whatever valuation is put to the closing stock will surface as opening stock and thereby a debit to that year's profit and loss account. In other words. the changed method will have neutral tax effect over the years. Only the method of valuation of the closing stock gets switched over from exclusive method to inclusive method. If the assessee is allowed to adjust the opening stock of the year in question then it would amount to distortion of the value of the closing stock of the earlier year. Unless such addition is made in the earlier year, the debit to this year's profit and loss account by means of addition to the opening stock will j reduce the taxable income and will only result in not applying the provisions of Section 145A of the Act in the year in question. The provisions, in our view. as introduced will have only to take into consideration the element of the tax, duty, cess or fee paid in the sales, purchases and inventory. It will not have an impact on the closing stock carried forward because what can be debited to this year's profit and loss account is the closing stock of the earlier year. There can be no exception to the rule that the closing stock of the earlier year will have to be necessarily the opening stock of this year The change in the method of valuation of the closing stock as a result of Section 145A has an overriding effect on Section 145 relating to method of accounting itself. In other words, notwithstanding what is contained in Section 145, the provisions of Section 145 A shall prevail. The sum and substance of that intent can only be achieved by making an addition to the value of the closing stock by its element of tax, duty, cess or fee, etc. and not by altering the opening stock. Whenever the assessees changed their method of accounting from one recognized method to another recognized method, there is bound to be tax effect in the year of change. But, over the year it is tax neutral. On the same analogy, when the Legislature has imposed a new system of valuing the closing stock it is bound to have an impact in that year, but becomes neutral in nature in the subsequent year. We therefore, do not find any infirmity in the order of the CIT (A) on this issue and confirm the same.