TMI Blog2008 (11) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... n ITA No. 1400/Del/2001, in respect of, assessment year 1997-98. 1.1 In the appeal the Revenue has raised two issues which impact the computation of Minimum Alternate Taxation (hereinafter referred to as MAT) under Section 115JA of the Act. These being :- 1. Whether provision for bad and doubtful debts amounting to Rs 1.01 crores was to be added back to the net profit while computing book profit under Section 115JA of 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 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs41,88,50,862/- is detailed out in the following manner:- Captive Power Plant Units generated Profit derived Kota 35 MW 18,41,17,747/- 30 MW 19,26,70,899/- 10 MW 7,70,25,351/- 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 Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of cost to others; (iii) the sanction given by RSEB was only for setting up of turbo generator and not for parallel generation and; (iv) lastly, the assessee was in the business of manufacturing fertilizer, 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 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly, in paragraph 44 of his order, the CIT(A) categorically returned a finding of fact that the Assessing Officer was wrong in stating that he had not gone into the issue of computation of profits at the time of conducting the assessment proceedings. The CIT(A) noted that the matter was queried and answered. The CIT(A) further noted that since the Assessing Officer in his letter dated 18.02.2000 had specifically stated that he had no opportunity of looking into the computation of profits derived from generation of power his comments were sought vide remand report dated 05.01.2001. 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The business of generation of electricity was itself an independent business and therefore the claim of the assessee was fully justified; (iv) that in the event the assessee had not used electricity generated by the CPPs which was transferred to its urea, cement and caustic and PVC plants at a price which was 7% lower than the rates charged by the State Electricity Board, it would have been compelled to buy the same from the State Electricity Boards at higher rates, in which situation, the profit arrived by the CPPs which is, the difference between the sale price charged by the CPPs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of generation of power or in the business of distribution and generation of power. In other words, no adjustments to book profits is available in respect of CPPs where, the main line of business is different from generation of power or generation and distribution of power. This submission is buttressed with an argument to the effect, that since no person can engage in business with himself, it cannot result in a profit and loss, and hence, there can be consequently no adjustment of books profits as envisaged under Explanation (iv) to Section 115JA of the Act. To support 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on with an outsider. According to us if the words and expression used in the said explanation (iv) are given their plain meaning then the claim of the assessee has to be accepted. 8.1 To answer the first contention as to whether there could be sale of power and resultant derivation of profits in a situation as the present one, one has to look no further than to the judgment of the Supreme Court in Tata Iron and Steel Ltd. (supra). In the said case Tata Iron and Steel Ltd had taken on lease certain iron ore mines. The extracted iron ore was used for making iron and steel in its factory at Jamshedpur. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th himself. 8.3 The Learned Attorney General on behalf of the Appellant's in the said case relied upon the principles laid down by the House of Lords in New York Life Insurance Company v. Styles: (1889) 2 Tax Cas. 460 that no one can make a profit out of himself. He also referred to an extract from the judgment of Rowlatt J. in Thomas v. Richard Evans and Co Ltd: (1926)11 Tax Cas. 790 which reads as follows:- 'It is true to say a person cannot make a profit court of himself, if what is meant is that he may provide himself with something at a lesser cost than that at which he could buy it, 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 prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law'. This was slightly expanded in the illustration given of a trader in rice withdrawing rice from his stock-in-trade for the purpose of consumption by his family. The learned Judge added that if the trader in rice transferred some stock to a private godown 'what he chooses to do with the rice in his godown is no concern of the income-tax department provided always that he does not sell it or otherwise 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. Aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of the finished steel or steel products by the company, no question of a person trading with himself would arise, but the very different one as to whether there could be a disintegration of the profits of an integrated business, between the component constituents which go to make it up. Undoubtedly, in order to ascertain the profits from the mine there would have to be a disintegration of the gross profits which finally emerge from the sale of the finished steel or steel products. What we desire to point out is that this involves no disintegration of the business affording scope for the contention based upon the principle 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hinery Corporation Ltd. v. CIT, West Bengal : 107 ITR 195(SC) as also, by a Division Bench of this Court in CIT v. Orissa Cement Ltd : 254 ITR 412 (Del). 12. In view of the ratio of the judgments of the Supreme Court referred to above, i.e., Tata Iron and Steel Ltd (supra), Textile Machinery Corporation Ltd (supra), as well as, that of the Division Bench of this Court in Orissa Cement (supra) it is quite evident that assessee's CPPs can as a matter of principle derive profits which is in point of fact embedded in the ultimate profit earned on the sale of the final product. 13. This brings us to the second contention as to whether 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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