CIT vs. DCM Sriram Consolidation Ltd. [2014] 368 ITR 720 (SC)
The assessee had four divisions, namely, Shriram Fertilizers and Chemicals, Shriram Cement Works, Shriram Alkalies and Chemicals and the textile division. In addition, the assessee also had four industrial undertakings which were engaged in captive power generation (hereinafter referred to as “CPP(s)”). Three out of the four CPPs were situated at Kota, which generated power equivalent 10 MW, 30 MW and 35 MW, respectively. The fourth CPP, at Bharuch, which was situated in the State of Gujarat, generated 18 MW power. For the purposes of setting up CPPs the assessee had taken requisite permission from the Rajasthan State Electricity Board (hereinafter referred as “ RSEB”), as well as the Gujarat State Electricity Board (hereinafter referred to as “GSEB”).
On 29th November, 1997, the assessee filed a return declaring a loss of Rs. 43,31,74,077. In a note attached to the return, the assessee had disclosed the profit and loss derived from each of the CPPs, and also indicated the formula adopted for computation of the profit derived from the respective CPPs. Briefly, the method for computation of profit and loss indicated in the note appended to the return was the rate per unit as charged by the respective State Electricity Board for transfer of power, reduced by 7% on account of absence of transmission and distribution losses (wheeling charges). From the figure obtained by applying the reconfigured rate per unit, deduction was made towards specific expenses, as well as common expenses attributable to each CPP so as to arrive at the figure of profit/loss of each CPP. In the note appended to the return of the assessee, the break up of total profit in the sum of Rs. 41,88,50,862 was detailed out in the following manner.
The assessee, however, for the purposes of the provisions of section 115JA of the Act based on its books of account, disclosed income of the sum of Rs.86,33,382. By an intimation dated 7th July, 1998, the Revenue processed the return filed by the assessee under the provisions of section 143(1)(a) of the Act. On 30th March, 1999, the assessee filed the revised return declaring a loss of Rs. 39,36,71,056. 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 u/s. 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 u/s. 115JA of the Act. In response to the querry 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 RSEB and the GSEB.
The Assessing Officer after a detailed discussion, vide order dated 24th March, 2000, rejected the claim of the assessee and added back the deduction claimed by the assessee from book profit, broadly on the following grounds:
(i) the memorandum and articles of association did not permit the assessee to engage in the business of generation of power;
(ii) the permission granted by the State Electricity Boards prohibited sale of energy so generated or supply of energy free of cost to others;
(iii) the sanction give by RSEB was only for setting up of turbo generator and not for parallel generation; and
(iv) the assessee was in the business of manufacturing fertiliser, for which purpose, it had received a subsidy as the urea manufactured was a controlled and consequently, a licensed item being subject to the retention price scheme of the Government of India which, mandated that since sale price and the distribution of urea was fully controlled, the manufacturer would be allowed a subsidy in a manner which 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 fertiliser, 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 was 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 generation of power.
The assessee being aggrieved, preferred an appeal to the Commissioner of Income-tax (Appeals). By an order dated 21st January, 2001, the Commissioner of Incometax (Appeals) allowed the appeal of the assessee with respect of the said issue.
Aggrieved by the order of the Commissioner of Incometax (Appeals), the Revenue preferred an appeal to the Tribunal. The Tribunal sustained the finding returned by the Commissioner of Income-tax (Appeals) in totality.
On further appeal by the Revenue, the High Court was of the view that the issue which required their determination was whether on a plain reading of the provisions of Explanation (iv) to section 115JA of the Act, the assessee would be entitled to reduce the book profits to the extent of profit derived fromits CPPs, while computing the MAT u/s. 115JA of the Act. According to the High Court, the entire objection of the Revenue to this claim on the assessee was pivoted on the submission that the assessee cannot derive profit from transfer of power from its CPPs to its other units for the following reasons:
(i) Firstly, there was no sale, inasmuch as, the transfer of power was not to a third party and consequently, no profits could have been earned by the assessee;
(ii) Secondly, in any event, the generation of power by CPPs would not constitute business within the meaning of Explanation (iv) to section 115JA of the Act as the main line of activity of the assessee was not the business of generation of power, an expression which finds mention in Explanation (iv) to section 115JA of the Act and;
(iii) Lastly, there was no mechanism for computing the sale price, and consequently, the profit which would be derived on transfer of energy from the assessee’s CPPs to its other units.
According to the High Court, the fallacy in the argument was self-evident, inasmuch as, counsel for the Revenue had proceeded on the basis that the words and expressions used in Explanation (iv) to section 115JA were to be confined to a situation which involved a commercial transaction with an outsider. According to the High Court , if the words and expression used in the said Explanation (iv) were to be given their plain meaning then the claim of the assessee had to be accepted.
The high Court thereafter went on to deal with each of the contentions of Revenue. To answer the first contention as to whether there could be sale of power and the resultant derivation of profits in a situation as the present one, the high Court held that one has to look no further than to the judgment of the Supreme Court in Tata Iron and Steel Co. Ltd. vs. State of Bihar [1963] 48 itr (SC) 123. Based on the ratio of the aforesaid Supreme Court decision, it was clear that in arriving at an amount that was to be deducted from book profits – which was really to the benefit of the assessee as it reduced the amount of tax which it was liable to pay under the provisions of section 115JA of the Act, the principle or apportionment of profits resting on disintegration of ultimate profits realised by the assessee by sale of the final product by the assessee had to be applied. In applying that principle it was not necessary to depart from the principle that no one could trade with himself.
When looked at from this angle, it was quite clear that the profit derived by the assessee on transfer of energy from its CPPs to its other units was “embedded” in the ultimate profit earned on sale of its final products. The assessee by taking resort to explanation (iv) to section 115JA had sought to apportion and, consequently, reduce that part of the profit which was derived from transfer of energy from its CPPs in arriving at book profits amenable to tax u/s. 115JA of the act.
As to the second contention as to whether the assessee was in the business of generation of power, based on the findings returned both by the Commissioner of Income- tax (appeals) as well as the tribunal, the high Court held that it could not 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 had been undertaken by the assessee by setting up a fully independent and identifiable industrial undertaking. these undertakings had separate and independent infrastructures, which were managed independently and whose accounts were 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 was not limited to one which is carried on only by engaging with an outside third party. The meaning of the word “business” as defined in section 2(13) 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 was, captive generation of power for its own purposes. The high Court held that the approach of the Commissioner of income-tax (appeals) and, consequently, the tribunal, both in law and on facts could not be faulted with. The High Court was of the opinion that the Assessing Officer had clearly erred in holding that, since the main business of the assessee was of manufacture and sale of urea, it could not be said to be in the business of generation of power in terms of explanation (iv) to section 115JA of the act.
In view of the discussion above, the high Court held that the assessee was entitled to reduce from its book profits, the profits derived from its CPPs, in determining tax payable for the purposes of section 115JA of the act. It also concurred with the line of reasoning adopted both by the Commissioner of income-tax (appeals) as well as the tribunal as regards the computation of sale price and consequent profits in terms of Explanation
(iv) of section 115JA of the act. the high Court further held that it was unfair to remand the matter for the purposes of computation of profits in terms of Explanation
(iv) u/s. 115JA of the act since the Commissioner of income-tax (appeals) had categorically recorded the facts with regard to computation and, particularly of its judgement that despite being given an opportunity by the Commissioner of income-tax (appeals) nothing had been brought on record by the Assessing Officer, which could persuade them to disagree with the computation filed by the assessee, which had been authenticated by the assessee’s auditors.
The Supreme Court dismissed the appeal filed by the revenue holding that the principle of law propounded in Tata Iron and Steel Co. Ltd. vs. State of Bihar (supra) had rightly been applied by the high Court in the facts and circumstances of the case.
