Deductions For Captive Power Profits Cannot Reduce Export Profit Deduction When Businesses Are Separate: Calcutta HC

The Calcutta High Court has ruled that deductions claimed on profits from captive power generation and export businesses must be computed independently and cannot be reduced against each other where the incomes arise from distinct sources.

“The deduction granted under Section 80-IA cannot be reduced while computing profits eligible for deduction under Section 80HHC where the deductions arise from independent businesses,” the court held.

A division bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar was hearing an appeal under Section 260A of the Income Tax Act filed by Graphite India Ltd. against an order of the Income Tax Appellate Tribunal for the assessment year 2002–03.

The taxpayer manufactures graphite electrodes and also operates captive power units that generate electricity largely for its own use in its manufacturing divisions. It claimed deduction under Section 80-IA on profits from this captive power generation activity by adopting, under Section 80-IA(8), the rate at which electricity is supplied by State Electricity Boards as the transfer price. It also claimed deduction under Section 80HHC on profits from export of graphite electrodes without reducing the power profits.

Section 80-IA of the Income Tax Act provides tax incentives to businesses engaged in infrastructure and power generation, including captive power undertakings, allowing deduction on profits derived from such eligible units. Section 80HHC, which applied at the time, provided deduction on profits derived from export of goods.

The tax department reduced the export profits eligible for deduction by invoking Section 80-IA(9), and also excluded the electricity duty component from the tariff used to compute profits of the captive power units. These findings were upheld by the Tribunal.

On the issue of valuation of captively consumed electricity, the High Court held that the tariff charged by State Electricity Boards to industrial consumers represents the correct benchmark, reflecting the price in the open market. Relying on decisions including CIT v. Jindal Steel and Power Ltd. and CIT v. ITC Ltd., the court held that such tariff constitutes the appropriate market value.

“The tariff payable to SEBs is a composite price and includes statutory levies such as electricity duty. Once the statute requires adoption of the price that electricity would ordinarily fetch in the open market, it is impermissible to artificially exclude components forming an integral part of such price.”

On the issue of overlapping deductions, the court clarified, relying on precedents including Shital Fibers Ltd. v. CIT and CIT v. Shah Alloys Ltd., that Section 80-IA(9) is intended only to prevent double deduction on the same profits and does not apply where deductions arise from distinct sources of income. It held that the Tribunal's interpretation could not be sustained.

“In the present case, the profits derived from generation of power are not export profits at all and are not eligible for deduction under Section 80HHC. Hence, there arise no question of double deduction. We accordingly, answer substantial question (b) in the negative, i.e., in favour of the assessee and against the revenue.”

The court also examined sales tax remission received by the taxpayer under the West Bengal Incentive Scheme, 1993, and held that it was capital in nature since it was linked to expansion and industrial investment.

“A perusal of the West Bengal Incentive Scheme, 1993 clearly demonstrates that the remission was intended to induce fresh capital investment and expansion of industrial capacity. It was not a subsidy to assist the taxpayer in carrying on its trade more profitably.”

Applying the “purpose test” laid down by the Supreme Court in CIT v. Ponni Sugars and Chemicals Ltd., and relying on decisions including CIT v. Shree Balaji Alloys and PCIT v. Ankit Metal & Power Ltd., the bench held that such capital receipts are not taxable.

It further held, relying on Apollo Tyres Ltd. v. CIT, that while computing book profits under Section 115JB, the Assessing Officer cannot make adjustments other than those specifically provided in the statute, and such capital receipts cannot be included in book profits.

Accordingly, the High Court allowed the appeal and answered all substantial questions of law in favour of the taxpayer

For Appellant: Senior Advocate J. P. Khaitan and Advocates, Somak Basu and Swagato Kabiraj

For Respondent: Advocates Aryak Datt and Madhu Jana