Hindustan Zinc Ltd. Vs CIT (Rajasthan High Court)

Rajasthan High Court held that profits and gains generated by captive consumption of electricity is eligible for deduction under section 80-IA of the Income Tax Act. Accordingly, appeal of revenue dismissed.

Facts- The assessee company derives income from manufacturing of zinc, lead and its by-products. The assessment of the assessee was completed on 22.12.2006 u/s. 143(3) of the Act of 1961 on total income of Rs. 7,33,72,00,910/- wherein AO had allowed the deduction under Section 80-IA of the Act, 1961 of Rs.27,89,49,535/- in respect of the assessee’s Captive Power Plant. However, in the revisionary proceedings u/s. 263, the claim u/s. 80-IA was disallowed.

Being aggrieved, assessee preferred an appeal before CIT(A) and the same was allowed. Accordingly, the present appeal is preferred by revenue.

Conclusion- Held that the electricity generation is an eligible business and in light of the interpretation of word ‘derive’, the profits and gains generated by the captive consumption of electricity, as involved herein, fall within the purview of eligible deductions under Section 80-IA of the Act of 1961. Therefore, this Court holds that the finding of the Tribunal that the profits derived by the assessee’s power generation unit would be eligible for deduction as a separate undertaking under Section 80-IA of the Act of 1961 is justified. Thus, the aforesaid substantial questions of law stand answered in favour of the Assessee and against the Revenue.

FULL TEXT OF THE JUDGMENT/ORDER OF RAJASTHAN HIGH COURT

1. The instant Income Tax Appeals have been preferred under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ‘Act of 1961’), claiming the following reliefs:

Income Tax Appeal No.1/2012 by Appellant (Assessee):

“(i) Allow the instant appeal and set aside or quash the impugned order of the ITAT dated 19.08.2001 in so far as it is against the appellant.

(ii) Decide the substantial questions of law in favour of the appellant and against the revenue.

(iii) Reframe suitable questions of law, if it is considered necessary, to do justice to the appellant.

Any other appropriate relief, as may be considered just and proper, including awarding of the costs may be granted in favour of the appellant.”

Income Tax Appeal No.13/2012 by Appellant (Revenue):

“It is, therefore, prayed that this appeal may kindly be allowed. By an appropriate order or direction the impugned order dated 19.08.20 passed by the learned tribunal and order of learned CIT passed under revisional jurisdiction may kindly be held to be sustained.

Any other order which may be considered just and proper in the facts and circumstances of the case may kindly be passed in favour of the appellant. Cost of the appeal be awarded in favour of the appellant.”

Income Tax Appeal No.88/2014 by Appellant (Revenue):

“It is, therefore, prayed that this appeal may kindly be allowed. By an appropriate order or direction the impugned order dated 29.11.2013 passed by the Tribunal may kindly be set aside and the order of AO may kindly be restored and upheld.

Any other order which may be considered just and proper in the facts and circumstances of the case may kindly be passed in favour of the appellant. Cost of the appeal be awarded in favour of the appellant.”

2. The present appeals were admitted on the following substantial question(s) of law:

Appeal No.1/2012 (Assessee), vide order dated  13.01.2012:

“(i) Whether Tribunal was justified in upholding that Commissioner of Income Tax was justified in invoking the powers under Section 263 of the Act because the order passed by the A.O. was in his opinion not only erroneous but prejudicial to the interest of Revenue within the meaning of Section 263 of the Act?”

Appeal No.13/2012 (Revenue), vide order dated  14.01.2013:

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee company is eligible for deduction u/s 80IA of the Income Tax Act, 1961 despite there being no real income from Captive Power Plant, Debari and no profit therefrom having been included in the gross total income?”

Appeal No.88/2014 (Revenue), vide order dated  22.01.2015:

“Whether on the facts and in the circumstances of the case, the Tribunal has been justified in holding that the assessee company is eligible for deduction u/s 80IA of the Income Tax Act, 1961 despite there being no real income from Captive Power Plant, Debari and no profit therefrom having been included in the gross total income?”

3. Since all the instant petitions involve a common controversy, though with marginal variation in the contextual facts, therefore, for the purposes of the present analogous adjudication, the facts and pleadings, looking into the relevance for the present adjudication, are being taken from the above-numbered D.B. Income Tax Appeal No.88/2014 (CIT, Udaipur Vs. M/s. Hindustan Zinc Ltd.), while treating the same as a lead case; rival submissions of the parties and the observations of the Court, in the present judgment, would also be based, particularly, on the factual matrix of the lead case.

4. Brief facts of the case are that the assessee company derives income from manufacturing of zinc, lead and its by-products. The original return was filed on 29.10.2004 declaring total income of Rs. 7,04,09,07,690/- which was subsequently revised to Rs.6,92,16,28,570/-. The assessment was completed on 22.12.2006 under Section 143(3) of the Act of 1961 on total income of Rs. 7,33,72,00,910/- wherein the Assessing Officer had allowed the deduction under Section 80-IA of the Act, 1961 of Rs.27,89,49,535/- in respect of the assessee’s Captive Power Plant.

4.1. The matter was taken under revisional jurisdiction provided under Section 263 of the Act, 1961 by the Commissioner of Income Tax, Udaipur considering the assessment order passed by the AO to be erroneous and prejudicial to the interest of the Revenue. Therefore, proceedings under Section 263 of the Act of 1961 were initiated. The revisional order under Section 263 of the Act of 1961 was passed setting aside the order of the AO vide order dated 30.03.2009 directing the AO to pass the order afresh after verification and as per provisions of the Act of 1961. The issue obtaining in Assessment Years 2007-08 & 2004-05 in this regard are identical.

4.2. The AO thereafter, passed an order dated 30.12.2009 and has disallowed the claim made under Section 80-IA of the Act of 1961; against which the assessee preferred an appeal before the CIT (A), who, vide order dated 12.05.2010, while holding the claim of the assessee to be in order, allowed the assessee’s claim by deleting the addition impugned therein. The Revenue against the said order filed an appeal before the learned Income Tax Appellate Tribunal, (hereinafter referred to as ‘learned Tribunal’), Jodhpur Bench, Jodhpur, whereupon the learned Tribunal, vide the order dated 29.11.2013 (impugned in Appeal No.88/2014) has been preferred by the Revenue, claiming the afore-quoted reliefs.

5. At this juncture, looking into the marginal variation in the factual matrix, it is pertinent to note here that in D.B. Income Tax Appeal No.1/2012, as pleaded in the memo of appeal, the appellant-assessee is aggrieved by order dated 19.08.2001 passed by the learned Tribunal to the extent of the findings recorded with regard to the point relating to set off in respect of past brought forwarded losses and unabsorbed depreciation of the period upto A.Y. 2003-04 against profit of captive power plant eligible for deduction under Section 80-IA of the Act of 1961 for A.Y. 2004­05; regarding which, the learned Tribunal has held that there has been a lack of enqiury in relation to the issue of quantum of deduction under Section 80-IA of the Act of 1961.

5.1. As regards D.B. Income Tax Appeal No.13/2012, it is noted that in the said appeal, the Revenue is aggrieved by the same impugned order dated 19.08.2001 passed by the learned Tribunal, while contending that the learned Tribunal was not justified in holding that the assessee is entitled for deduction under Section 80-IA of the Act of 1961 in respect of notional profits on account of power generated from its own captive power plant, whereas, according to the Revenue, there was no real income from the said Plant and no profit therefrom has been included in the gross total income of the assessee.

6. Notwithstanding the above, the bone of contention in the instant bunch of cases lies in the issue as to whether the profits derived by assessee’s power generation unit would be eligible for deduction as a separate undertaking under Section 80-IA. For it to be allowed, all the conditions which are sine qua non for claiming deduction under Section 80-IA are to be fulfilled.

7. As against the case set up by the Revenue, as reflected from the record and noted hereinabove, the case of the assessee is that it has fulfilled the three conditions as prescribed in sub-section (3) of 80-IA of the Act.

7.1. The brief submissions in respect of each of the conditions are as under:

i) Profits from Eligible Business:

The undertaking is engaged in generation or generation and distribution of power which is an eligible business in terms of Section 80-IA 4(iv)(a).

ii) Undertaking is not formed by splitting up or reconstruction of business already in existence:-

The power plant was not formed by splitting of or reconstruction of business already in existence. The whole power plants were set upright from scratch and the contract for setting up of power plant was inter alia given to Wartsila for a total consideration of Rs. 69.24 Crore.

In the assessment order also there was no dispute raised on this matter.

(iii) No transfer of machinery/plant from other business in  excess of 20% of value of plant and machinery:-

Since the CPPs were totally new undertakings, where the suppliers including Wartsila were required to supply to all the plant and machinery; hence the entire plant and machinery were new and not used one.

7.2. To substantiate the case of the assessee herein, reliance has been placed upon the judgment rendered by the Hon’ble High Court of Delhi in Commissioner of Income-tax Vs. Orient Abrassive Ltd., (2014) 49 taxmann.com 174 (Delhi).

8. Heard learned counsel for the parties as well as perused the record of the case, alongwith the judgment cited at the Bar.

9. This Court observes that the contention of the Revenue that only whatever power generated from the sale to an outsider or the Electricity Board, and the profit or gain derived by such sale alone can be taken as profits or gains derived by the assessee as mentioned in Section 80-IA(1) of the Act of 1961, has been rejected by the Tribunal in the impugned order.

9.1. In order to appreciate the aforementioned contention, it is pertinent to scrutinize the relevant sub-sections of Section 80-IA of the Act of 1961 are reproduced as hereunder:

“Section 80-IA – Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.

(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub­section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.

(4) This section applies to—

(i) any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility which fulfils all the following conditions, namely:—

(a) it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act;

(b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility;

(c) it has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995: Provided that where an infrastructure facility is transferred on or after the 1st day of April, 1999 by an enterprise which developed such infrastructure facility (hereafter referred to in this section as the transferor enterprise) to another enterprise (hereafter in this section referred to as the transferee enterprise) for the purpose of operating and maintaining the infrastructure facility on its behalf in accordance with the agreement with the Central Government, State Government, local authority or statutory body, the provisions of this section shall apply to the transferee enterprise as if it were the enterprise to which this clause applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period during which the transferor enterprise would have been entitled to the deduction, if the transfer had not taken place:

Provided further that nothing contained in this section shall apply to any enterprise which starts the development or operation and maintenance of the infrastructure facility on or after the 1st day of April, 2017.

Explanation.—For the purposes of this clause, “infrastructure facility” means—

(a) a road including toll road, a bridge or a rail system;

(b) a highway project including housing or other activities being an integral part of the highway project;

(c) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;

(d) a port, airport, inland waterway, inland port or navigational channel in the sea;

(ii) any undertaking which has started or starts providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services on or after the 1st day of April, 1995, but on or before the 31st day of March, 2005.

Explanation.—For the purposes of this clause, “domestic satellite” means a satellite owned and operated by an Indian company for providing telecommunication service;

(iii) any undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone notified by the Central Government in accordance with the scheme framed and notified by that Government for the period beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2006:

Provided that in a case where an undertaking develops an industrial park on or after the 1st day of April, 1999 or a special economic zone on or after the 1st day of April, 2001 and transfers the operation and maintenance of such industrial park or such special economic zone, as the case may be, to another undertaking (hereafter in this section referred to as the transferee undertaking), the deduction under sub-section (1) shall be allowed to such transferee undertaking for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee undertaking:

Provided further that in the case of any undertaking which develops, develops and operates or maintains and operates an industrial park, the provisions of this clause shall have effect as if for the figures, letters and words “31st day of March, 2006”, the figures, letters and words “31st day of March, 2011” had been substituted;

(iv) an undertaking which,— (a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2017;

(b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2017:

Provided that the deduction under this section to an undertaking under sub-clause (b) shall be allowed only in relation to the profits derived from laying of such network of new lines for transmission or distribution;

(c) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time during the period beginning on the 1st day of April, 2004 and ending on the 31st day of March, 2017. Explanation.—For the purposes of this sub-clause, “substantial renovation and modernisation” means an increase in the plant and machinery in the network of transmission or distribution lines by at least fifty per cent of the book value of such plant and machinery as on the 1st day of April, 2004;

(v) an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant, if—

(a) such Indian company is formed before the 30th day of November, 2005 with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant and such Indian company is notified before the 31st day of December, 2005 by the Central Government for the purposes of this clause;

(b) such undertaking begins to generate or transmit or distribute power before the 31st day of March, 2011;

(vi) [***]

(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.

(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as 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 the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date :

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means—

(i) the price that such goods or services would ordinarily fetch in the open market; or

(ii) the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA. (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

.      .        .”

10. This Court observes that upon perusal of Section 80- IA of the Act of 1961, it is clear that the essential ingredients to be satisfied are provided under sub-section (1) of Section 80-IA, so as to enable the assessee to become entitled for claiming the deduction in question. For that matter, the assessee should have set up an undertaking or an enterprise and from and out of such an undertaking or an enterprise set up, any profit or gain is derived, falling under sub- section covered by sub-section (4) of Section 80-IA of the Act of 1961; such profit or gain derived by the assessee can be deducted in its entirety for a period of 10 years starting from the date of functioning of the set up.

11. This Court also observes that in order to determine the rightness of the interpretation of sub-section (4) to Section 80-IA as is contended by the learned counsel on behalf of the Revenue that profit or gain can be claimed by the assessee only if such profit or gain is derived by the sale of its product or power generated to an outsider, it is pertinent to peruse said sub-section. 11.1 This court observes that sub-section (4) to Section 80-IA uses the term “derived” which requires an interpretation in the present case for the determination of the issue at hand.

11.2. At the juncture, the Court is conscious of the judgment rendered by the Hon’ble Delhi High Court in the case of Orient Abrassive Ltd., (supra) and Hon’ble Madras High Court in the case of Tamil Nadu Petro Products Ltd. vs. Assistant Commissioner of Income Tax, (2011) 338 ITR 643 following the judgment rendered by the Hon’ble Supreme Court in the case of Tata Iron and Steel Co. Ltd. Vs. The State of Bihar, AIR 1963 SC 577 the term “derived” has been interpreted. In the said case, the Hon’ble Court was dealing with Section 80IA of the Act of 1961, where the assessee had an electricity generation unit, that was supplying electricity to the same assessee and not to third parties. The Hon’ble Court while observing that profits from captive consumption would be eligible, referred to judgment rendered by the Hon’ble Madras High Court in the case of CIT vs. Thiagarjar Mills Limited, Tax Case (Appeal) Nos. 68 to 70 of 2010, dated 7.6.2010; relevant paragraphs of the judgment rendered in Thiagarjar (Supra), as reproduced in Tamilnadu Petro Products Ltd. (supra), read as under:

“4. After considering the issue, the statutory requirement as prescribed under section 80-IA (1) has been stated in paras 8 and 9 of the abovesaid judgment which reads thus:

“8. The contention that only whatever power generated from the sale to an outsider or the Electricity Board, and the profit or gain derived by such sale alone can be taken as profits or gains derived by the assessee as mentioned in section 80-IA(1) of the Income-tax Act, has been rejected by the Tribunal in the order impugned. In our considered view, the Tribunal was well justified in having rejected such a stand of the appellant. Having referred to section 80-IA(1) of the Income-tax Act, we are also convinced that what is all to be satisfied in  order to be eligible for the deduction as provided under sub­section (1) of section 80-IA, the assessee should have set up  an undertaking or an enterprise and from and out of such an  undertaking or an enterprise set up, any profit or gain is  derived, falling under sub-section covered by sub-section (4)  of section 80-IA of the Income-tax Act, such profit or gain  derived by the assessee can be deducted in its entirety for a period of 10 years starting from the date of functioning of the set up. The contention that profit or gain can be claimed by the assessee only if such profit or  gain is derived by the sale of its product or power generated to an outsider cannot be the  manner in which the provisions contained in section 80-IA(1) can be interpreted. The expression derived used in  the said section 80-IA(1) in the beginning as well as in the last part of sub-section (4) makes it abundantly clear that such  profit or gain could be obtained by one’s own consumption  of the outcome of any such undertaking or business  enterprise as referred to in sub-section (4) of section  80-IA.  The dictionary meaning of the expression derive in the New Oxford Dictionary of English states obtaining something from a specified source. In section 80-IA(1) also no  restriction has been imposed as regards the deriving of profit or gain in order to state that such profit or gain derive d only through an outside source alone would make eligible for the benefits provided in the said section.

9. Therefore, there is no difficulty in holding that captive consumption of the power generated by the assessee from its own power plant would enable the respondent/  assessee to derive profits and gains by working out the  cost of such consumption of power inasmuch as the  assessee is able to save to that extent which would  certainly be covered by section 80-IA(1). When such will be the outcome out of own consumption of the power generated and gained by the assessee by setting up its own  power plant, we do not find any lack of merit in the claim of the respondent/assessee when it claimed by relying upon  section 80-IA(1) of the Income-tax Act by way of deduction of the value of such units of power consumed by its own plant  by way of profits and gains for the relevant assessment years.”

15. In view of the above, this Court observes that the electricity generation is an eligible business and in light of the interpretation of word ‘derive’, the profits and gains generated by the captive consumption of electricity, as involved herein, fall within the purview of eligible deductions under Section 80-IA of the Act of 1961. Therefore, this Court holds that the finding of the Tribunal that the profits derived by the assessee’s power generation unit would be eligible for deduction as a separate undertaking under Section 80-IA of the Act of 1961 is justified.

16. Thus, the aforesaid substantial questions of law stand answered in favour of the Assessee and against the Revenue.

17. Consequently, B. Income Tax Appeal No.1/2012 preferred by the Assessee is allowed, while quashing and setting aside the impugned order dated 19.08.2011 passed by the learned Tribunal, as prayed by the Assessee.

17.1. D.B. Income Tax Appeals No.13/2012 & 88/2014, as preferred by the Revenue are dismissed, while declining to grant the reliefs prayed for therein, and upholding the orders of the learned Tribunal dated 19.08.2011 & 29.11.2013, respectively, as impugned in the said appeals.