Income Tax Act | To Compute Deduction Under S. 80-IA, Market Value Of Electricity Is The Rate At Which State Board Supplies Power : Supreme Court

The Supreme Court has held that for the purpose of computing deduction under Section 80 IA of the Income Tax Act, 1961, the rate at which the State Electricity Board supplies power to the consumers has to be taken as the market value of electricity.

Section 80-IA of the Income Tax Act deals with deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development etc. M/s Jindal Steel & Power Limited (“Assessee”) had set up captive power generating units to supply electricity to its industrial units and supplied surplus to State Electricity Board. Assessee claimed deduction under Section 80-IA in respect to profits of the power generating units. The Revenue reduced the claimed deduction amount, while holding that the deduction should be computed at the price at which electricity was supplied by the Assessee to the State Electricity Board.

The Bench comprising Justice B. V. Nagarathna and Justice Ujjal Bhuyan, has dismissed the appeal filed by Revenue, while holding as under:

“Thus on a careful consideration, we are of the view that the market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity. It should not be compared with the rate of power sold to or supplied to the State Electricity Board since the rate of power to a supplier cannot be the market rate of power sold to a consumer in the open market. The State Electricity Board's rate when it supplies power to the consumers have to be taken as the market value for computing the deduction under Section 80-IA of the Act.”

BACKGROUND FACTS

M/s Jindal Steel and Power Ltd. (“Assessee”) is engaged in the business of generation of electricity, manufacture of sponge iron, M.S. Ingots etc. The Assessee has set up captive power generating units to supply electricity to its industrial units. In 1999, the Assessee entered into an agreement with the State Electricity Board, whereby surplus electricity produced was to be supplied to the latter at the rate of Rs.2.32 per unit.

On 29.10.2001, the Assessee filed return of income declaring nil income, claiming various deductions including under Section 80 IA of the Income Tax Act, 1961 (“IT Act”) for Rs.80,10,38,505/-, in respect to profits of the power generating units of the assessee.

The Assessing Officer of Income Tax found that the Assessee supplied electricity to its industrial units for captive consumption at the rate of Rs.3.72 per unit. Whereas, electricity was being supplied to State Electricity Board at the rate of Rs.2.32 per unit. It was observed that the profit calculated by the Assessee (power generating units) at the rate of Rs.3.72 per unit was inflated and not real, and the same was done to qualify for deduction from the taxable income under the IT Act.

The Assessing Officer opined that Rs.2.32 per unit, i.e. the rate at which the Assessee supplied electricity to State Electricity Board, was the market value of electricity. Therefore, for computing profit of power generating units, the selling rate of power per unit was taken at Rs.2.32. Accordingly, the Assessing Officer concluded that there was an excessive claim of deduction of Rs.1.40 per unit on captive consumption (Rs.3.72 - Rs.2.32). The Assessing Officer passed an order recomputing the profits of power generating units at the rate of Rs. 2.23 and consequently, the deduction claimed by the Assessee under Section 80 IA was also reduced. In appeal, the Appellate Authority upheld the order of the Assessing Officer.

The order of Appellate Authority was challenged by the Assessee before the Income Tax Appellate Tribunal. The Tribunal computed the market value of electricity supplied by the captive power plants of the Assessee to its industrial units, after comparing it with the rate of power available in the open market i.e., the price charged by the State Electricity Board while supplying electricity to the industrial consumers. Accordingly, the Tribunal directed the Assessing Officer to allow relief to the Assessee under Section 80 IA as claimed.

When the Revenue filed an appeal before the High Court, the High Court upheld the order passed by the Tribunal and decided the appeal against the Revenue.

Consequently, the Revenue filed an appeal before the Supreme Court against the High Court order.

SUPREME COURT VERDICT

The Bench interpreted the expression “market value” for the purpose of Section 80-IA to mean, “price of a good arrived at between a buyer and a seller in the open market i.e., where the transaction takes place in the normal course of trading. Such pricing is unfettered by any control or regulation; rather, it is determined by the economics of demand and supply.”

It was further noted that the captive power plants of Assessee could sell or supply the surplus electricity to the State Electricity Board alone. Thus, a contract was entered between the Parties wherein price for supply of electricity was fixed at Rs. 2.32 per unit. The said price is a contracted price with no room for negotiation on the part of Assessee, since the State Electricity Board is in a dominant position.

The Bench concluded that the manner of determination of tariff between Assessee and State Electricity Board does not reflect the price determined in normal course of trade and competition.

The manner for computing market value of electricity supplied by Assessee to its industrial units has been clarified as under:

“Thus, market value of the power supplied by the assessee to its industrial units should be computed by considering the rate at which the State Electricity Board supplied power to the consumers in the open market and not comparing it with the rate of power when sold to a supplier i.e., sold by the assessee to the State Electricity Board as this was not the rate at which an industrial consumer could have purchased power in the open market. It is clear that the rate at which power was supplied to a supplier could not be the market rate of electricity purchased by a consumer in the open market. On the contrary, the rate at which the State Electricity Board supplied power to the industrial consumers has to be taken as the market value for computing deduction under Section 80 IA of the Act.”

The Bench held that the market value of the power supplied by the State Electricity Board to the industrial consumers should be construed to be the market value of electricity for computing deduction under Section 80-IA of IT Act.

The High Court order has been upheld and the appeal has been dismissed.

Case Title: Commissioner Of Income Tax v M/s Jindal Steel & Power Limited

Citation: 2023 LiveLaw (SC) 1048

Click here to read the judgment