Additional Commissioner of Income-tax, Hisar Range, Hisar v. Jindal Steel & Power Ltd.

G.S. Pannu, Accountant Member. - We find it convenient to dispose of these cross appeals by the Revenue and the assessee by this common order, as these emanate from the same order of the CIT(A), Rohtak dated 16-5-2005 relating to assessment year 2001-02.

2. We shall first deal with the appeal of the Revenue wherein the solitary ground reads as follows :—

"On the facts and in the circumstances of the case, ld. CIT(A) has erred in deleting the addition of Rs. 4,06,000 representing difference of deposits shown to have been received from S/Shri M.R. Kulkarni, Kanti Parshad, Smt. Padma and Smt. Lila Khanna ignoring the letters of confirmations received from these persons showing deposits of Rs. 35,000, Rs. 25,000 and Rs. 3,00,000 as against Rs. 65,000, Rs. 86,000, Rs. 50,000 and Rs. 6,00,000 shown by the assessee in its books of account."

3. The assessee is a public limited company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of generation of electric power, manufacture of sponge iron, M.S. Ingots etc. The Assessing Officer in the case of assessment proceedings for the assessment year under consideration i.e. 2001-02 carried out verification exercise of the deposits received by the assessee from public. The Assessing Officer found that in case of four persons, there was variation in the amount of deposits shown by the assessee and the amount shown by the concerned depositor. The difference amounting to Rs. 4,06,000 in relation to four parties was held assessable as income in terms of section 68 of the Income-tax Act, 1961 (in short, ‘the Act’). The said addition has since been deleted by the CIT(A) against which the Revenue is in appeal before us.

4. Before us, the ld. Departmental Representative has relied upon the order of the Assessing Officer in support of the case of the Revenue. The ld. D.R. pointed out that the addition has been made by the Assessing Officer on the basis of verification exercise and, therefore, the same deserves to be upheld.

5. On the other hand, the ld. Counsel for the assessee has relied upon order of the CIT(A) on this issue. According to him, in the instant case, the assessee had received the impugned deposits from public at large and that it was not a case of a cash credit simpliciter. According to the ld. Counsel, the public deposits have been received in terms of a scheme formulated by the assessee as per the requirements of the Companies Act, 1956. That, in any case, the receipt of deposits and their repayments are made by way of account-payee cheques through normal banking channels. Thus, to hold that the deposits in question carry any tag of assessee’s income from undisclosed sources would be unjustified, in any case, according to the ld. Counsel, the result of inquiries conducted by the Assessing Officer was never confronted to the assessee and thus no addition is sustainable.

6. We have carefully considered the submissions of both the parties and find that the basis adopted by the CIT(A) for deleting the addition has not been assailed by the revenue before us. The CIT(A) in para 18 of his order records a finding that the nature and result of the purported inquiries conducted by the Assessing Officer was not confronted to the assessee at any stage. There is no challenge to this aspect of the addition, therefore, in the light of the decision of the Supreme Court in the case of Kishinchand Chellaram v. CIT [1980] 125 ITR 713¹ , the impugned addition is unsustainable for the reason that the same is based on material which has been collected at the back of the assessee and the same has not been confronted to the assessee for its rebuttal. In this manner, by adverting to the aforesaid short reasoning, we hereby affirm the decision of the CIT(A) and Revenue fails in its appeal.

7. In its appeal, the assessee has preferred five Grounds of appeal which we shall deal with in seriatim. In Ground No. 1, the grievance of the assessee is against the action of the CIT(A) in confirming the allowance of deduction under section 80-IA of the Act at Rs. 48,11,72,000 as against deduction of Rs. 80,10,38,505 claimed by the assessee. The background of the impugned dispute is as follows :

The assessee had claimed deduction under section 80-IA in respect of two of its undertakings engaged in the business of generation of electric power at Raigarh (Chhattisgarh). The power generated by the assessee was used by it for own consumption as well as for sale to the State Electricity Board (in short, ‘the Board’). The Assessing Officer noted that the assessee received Rs. 2.32 for each unit of electricity supplied to the Board whereas for the power supplied to its own units for captive consumption, the assessee recorded it at Rs. 3.72 per unit, in other words, the profits of the undertaking engaged in the generation of power was computed by taking the sale price of power supplied to its own units at Rs. 3.72 per unit, whereas for the power supplied to the State Electricity Board the price was recorded at Rs. 2.32 per unit. The price recorded from the State Electricity Board was the actual price realized in terms of an agreement. In this background, the Assessing Officer was of the opinion that profits and gains of the undertakings engaged in generation of power was not correctly computed by the assessee. The Assessing Officer invoked the provisions of section 80-IA(8) of the Act in this regard. According to the Assessing Officer, the consideration recorded by the Power Generation Units for transfer of power to the other units of the assessee did not correspond to the market value and, therefore, the profits and gains computed thereon was incorrect. According to the Assessing Officer, the consideration recorded at Rs. 3.72 per unit was higher than the market value. The Assessing Officer was of the opinion that the profits and gains of the undertakings engaged in the generation of power was to be computed by applying the rate of Rs. 2.32 per unit even for the power supplied to its own units. The Assessing Officer has justified the adoption of Rs. 2.32 per unit as the market price on the basis of the fact that the State Electricity Board was buying power from the assessee at such rate. Hence, the scaling down of the deduction claimed by the assessee under section 80-IA of the Act. The aforesaid action of the Assessing Officer has since been upheld by the CIT(A) too.

8. The stand of the assessee, on the contrary, has been that the consideration for power transferred to its own manufacturing units for captive consumption has been correctly recorded by the assessee at Rs. 3.72 per unit, as the same was the market rate. The market rate of Rs. 3.72 per unit has been attempted to be justified by the assessee on the basis that the State Electricity Board supplied power to the industrial consumers at the said rate. It was submitted that the price determined in terms of the agreement with the State Electricity Board of Rs. 2.32 per unit did not reflect the market value since the said agreement was determined by the State Electricity Board.

9. We find that the aforesaid pleas of the assessee have not found favour with the CIT(A). According to the CIT(A), notwithstanding the fact that the State Electricity Boards were the only buyers of the electricity, yet the price offered by it can alone be liable to be treated as the market value of the goods in question. Against the aforesaid stand, the assessee is in appeal before us.

10. Before us, the ld. Counsel for the assessee has assailed the stand of the Revenue by pointing out that the price offered by the State Electricity Board has been erroneously equated with the market price of the power. According to the ld. Counsel, it is only the surplus of the electricity available with the assessee after meeting the captive consumption requirements that is sold to the Board in terms of a Power Purchase Agreement executed on 15-7-1999 - a copy whereof is placed on record. The ld. Counsel pointed out that in terms of the mandate of the Indian Electricity (Supply) Act, 1948, the assessee could not sell its surplus power to a third party and, therefore, it supplied power to the Board at the price determined by the buyer. The ld. Counsel pointed out that section 80-IA(8) of the Act only mandates that the transfer price should correspond to the market value and that such market value has to be determined having regard to a free trade occurring between a willing buyer and willing seller. According to him, in the instant case, the price at which the power was bought by the Board could not be construed as a transaction between a willing buyer and a willing seller. The ld. Counsel referred to the provisions of the Indian Electricity (Supply) Act, 1948, wherein there are restrictions on the generation and distribution of power inasmuch as it stipulates that the power generated can be either captively consumed or supplied to the State at the stipulated rates. Our attention was drawn to the Paper Book wherein is placed relevant extracts of the Indian Electricity (Supply) Act, 1948 as also the Power Purchase Agreement between the assessee and the Board. The ld. Counsel pointed out that in this case the assessee itself was utilizing the power supplied by the Electricity Board in other units and the fact was that the assessee was paying Rs. 3.72 per unit for such supplies. Therefore, it is this price which is to be reckoned as the market rate for the purposes of section 80-IA(8) of the Act also. In support of the propositions, the ld. Counsel has referred to the following decisions:—

(i) West Coast Paper Mills Ltd. v. Commissioner Of Income-Tax, Bombay [2006] 103 ITD 19 (Mum.);

(ii) Indian Aluminium Co. Ltd. v. Dy. CIT [IT Appeal Nos. 1221 & 1405 (Kol.) of 2006];

(iii) Assam Carbon Products Ltd. v. Commissioner Of Income-Tax [2006] 100 TTJ (Kol.) 224.

11. On the other hand, the ld. D.R. has relied upon the reasoning adopted by the lower authorities in support of the case of the Revenue. The ld. D.R. has argued that the price recovered by the assessee from an outside party, namely, the State Electricity Board, was the best indicator in determining the market value and that the same rate should be adopted in computing the eligible profits under section 80-IA even in relation to the power supplied by the assessee to its own manufacturing units.

12. We have carefully considered the submissions of both the parties on this aspect. The crux of the dispute before us relates to the manner of computing profits of the undertakings of the assessee engaged in generation of power for the purposes of relief under section 80-IA of the Act. The difference between the assessee and the Revenue is with regard to the determination of the market value of power so as to record the income accrued to the assessee on supplies made to its own manufacturing units. As noted earlier, in this case, the assessee has utilized the power generated for its captive consumption by way of supplies to its other manufacturing units and also for sale to the State Electricity Board. The dispute essentially relates to the mechanism of section 80-IA(8) of the Act. section 80-IA(8) provides that where an assessee, which is eligible for section 80-IA benefits, transfers its goods or services to a business other than the eligible business, the consideration, if any, recorded for such transfer in the accounts of the eligible business should correspond to the market value of such goods or services. The said section authorizes the Assessing Officer that where the transfer as recorded in the accounts of the eligible business does not correspond to the market value, the profits declared of the eligible business can be adjusted by the Assessing Officer on such basis so as to ensure that goods or services transferred to its own unit is done at the market value of such goods or services. Ostensibly, in this case, the Assessing Officer was of the opinion that the consideration for transfer of power for captive consumption to other units has been recorded at a consideration which does not correspond to its market value. According to the the Assessing Officer, the consideration has been recorded at a price higher than the market value, in other words, the Assessing Officer does not perceive Rs. 3.72 per unit as the market value of the power generated by the assessee and instead adopts Rs. 2.32 per unit as the market value, being the price at which the assessee sells power to the Board.

13. Before we proceed further, it is also relevant to understand the implications of the expression "market value" as appearing in section 80-IA(8) of the Act. In the Explanation below section 80-IA(8), it is provided that the expression "market value" for the purposes of the sub-section means the price that such goods or services would ordinarily fetch in the open market. In the above context, it therefore becomes important for us to consider as to whether the price charged by the assessee for power supplied to its own manufacturing units at the rate of Rs. 3.72 per unit can be said to be constituting a market value of its goods, namely, power.

14. In the Advanced Law Lexicon by P. Ramanatha Aiyar, 3rd Edition, 2005, the market price or market value has been defined as below:—

"Market price or value.—The price fixed by buyer and seller in an open market in the usual and ordinary course of lawful trade and competition; the price or value of the article established or shown by sales, public or private, in the ordinary way of business; the fair value of the property as between one who desires to purchase and one who desires to sell; the current price."

Similarly, in the case of Orchard v. Simpson [1857] 2 CBNS 299, the phrase "market value" in a contract for the sale of goods has been understood to mean the price in the market to an ordinary consumer, irrespective of the particular contract.

Similarly, in Law Lexicon by P. Ramanatha Aiyar, with reference to U.S. v. Certain : Property in Borough of Manhattan, City County and State of New York, CANY, 403 F.2d800, 802, it has been explained that the market value of an article or piece of property is the price which it might be expected to bring if offered for sale in a fair market; not the price which might be obtained on a sale at public auction or a sale forced by the necessities of the owner, but such a price as would be fixed by negotiation and mutual agreement, after ample time to find a purchaser, as between a vendor who is will (but not compelled) to sell and a purchaser who desires to buy but is not compelled to take the particular article or piece of property.

15. Therefore, from the aforesaid, it can be deduced that market value is an expression which denotes a price arrived at between the buyer and the seller in the open market wherein the transactions take place in the normal course of trading and competition in contrast to a situation where the price is fixed between a buyer and a seller in a negotiation done under the shadow of legislatively mandated compulsion. In the case of the former, the price fixed between the buyer and seller can be understood as denoting ‘market price’ since the elements of trading and competition exist. Whereas in the case of the latter situation, the price fixed between the buyer and seller cannot be understood as denoting the market price since the elements of trade and competition are conspicuous by their absence.

16. To understand the contrasting situations, let us analyze the situation on hand. In this case, the assessee received consent under section 44A of the Electricity (Supply) Act, 1948 to establish and operate the captive power plant in terms of a Power Purchase-cum-Wheeling of Power Agreement dated 15-7-1999 entered between the State Electricity Board and the assessee. A copy of the said agreement has been placed in the paper book. Now, in terms of the Electricity (Supply) Act, 1948, the Legislature has put restrictions on establishment of power generating units and their functioning. The power generating units are allowed to use power for captive consumption and the surplus available, if any, is to be sold transferred to the State Electricity Boards. Section 43 of the Electricity (Supply) Act, 1948 only authorizes the State Electricity Board to enter into arrangements for purchase and sale of electricity under certain conditions. Section 43A of the Electricity (Supply) Act, 1948 also lays down rules and conditions for determining the tariff for the sale of electricity by a generating company to the State Electricity Boards. A perusal of the same reveals that the tariff is determined on the basis of various parameters contained therein. From the aforesaid, it is evident that on one hand it is only upon granting of specific consent that a private person can set up a power generating unit having restrictions on the use of power generated and at the same time the tariff at which a power generating unit can supply power to the Electricity Board is also liable to be determined in accordance with the statutory requirements. In this context it can be safely deduced that determination of tariff between the assessee and the Board can be said to be an exercise between a buyer and seller neither in a competitive environment and nor in the ordinary course of trade and business. It is an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set the buying tariff in terms of preset statutory guidelines. Therefore, the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Therefore, the price determined as per the Power Purchase Agreement cannot be equated with market value as understood in common parlance. We see no reason for not holding so for the purposes of section 80-IA(8) also.

17. In this background, we may make a gainful reference to the decision of the Hon’ble Calcutta High Court in the case of CAIT v. Manmatha Nath Mukherjee [1958] 34 ITR 567, which has been relied on by the assessee before us. The issue before the Hon’ble Calcutta High Court was in the context of the Bengal Agricultural Income-tax Act, 1944. Shorn of other details, the question considered by the Hon’ble High Court, relevant for the present, was whether the procurement rate of paddy offered by the State could be considered to be the market value of paddy. In this background, the following observations of the Hon’ble High Court are worthy of notice:—

"A market connotes freedom of bargain. There may be a market, completely circumscribed as regards the rates by price control, but within the limit set by the relevant rule or order, the area of operation would still be a commercially free area. Even where a control price is fixed, it is generally the ceiling which is fixed and not an invariable price. Be that as it may, to say that when agents of the State seize paddy grown by subjects under the authority of some law or regulation and pay for it at some rate fixed by themselves and much below the rate in the open market, they create a regulated or any kind of market at all, is if I may be permitted to use the strong expression, a misuse of language. The Tribunal even speak of the persons whose paddy is seized as "operating" in the regulated market. How any person who is seized by the neck and compelled to deliver his paddy and then dismissed with a trivial sum as its price can be said to operate in the market is beyond my comprehension."

From the aforesaid, an analogy that can be safely deduced is that the market value cannot be the result of a transaction which has been entered into between a buyer and a seller in a situation where one of the parties is carrying the compulsive mandate of the Legislature. The situation before us is such wherein the aforesaid analogy can be usefully applied. As we have seen earlier, the price at which the power is supplied by the assessee to the Board is determined entirely by the Board in terms of the statutory regulations. Such a price cannot be equated with the market value as understood for the purposes of section 80-IA(8) of the Act. The stand of the Revenue to the aforesaid effect cannot be approved.

18. Having held so, the natural corollary is to ascertain whether the price recorded by the assessee at Rs. 3.72 pet unit can be considered to be the market value for the purposes of section 80-IA(8) of the Act. The answer, to our mind, is in the affirmative. This is for the reason that the assessee as an industrial consumer is also buying power from the Board and the Board supplies such power at the rate of Rs. 3.72 per unit to its consumers. This is the price at which the consumers are able to procure the power. We may consider hypothetical situation as well. Had the assessee not been saddled with restrictions of supplying surplus power to the State Electricity Board, it would have supplied power to the ultimate consumers at rates similar to those of the Board or such other competitive rates, meaning thereby that price received by the assessee would be in the vicinity of Rs. 3.72 per unit i.e. charged by the Board from its industrial consumers/users. Thus, under the given circumstances, it would be in the fitness of things to hold that the consideration recorded by the assessee’s undertaking generating electric power for transfer of power for captive consumption at the rate of Rs. 3.72 per unit corresponds to the market value of power. Therefore, on this aspect, we uphold the stand of the assessee and set aside order of the CIT(A) and direct the Assessing Officer to allow relief to the assessee under section 80-IA as claimed. Assessee succeeds on this ground.

19. In the second ground, the grievance of the assessee is against the sustenance of addition of Rs. 15,68,171 out of the expenditure on aircraft. The assessee had two aircrafts which it claimed to have used for the purposes of business. Out of the total expenditure, the Assessing Officer was of the view that a sum of Rs. 15,78,171 relatable to the journeys performed for non-business purposes was disallowable. The addition has also since been sustained by the CIT(A) against which the assessee is in appeal before us.

20. Before us, the plea of the assessee is that the journeys in question cannot be said to be unrelated to the business purposes. In this connection, the details of the journey as well as the purpose for the same have been tabulated in the following manner:—

DETAILS OF FLYING OF B-200

DETAILS OF FLYING OF C-90 DISALLOWED

21. On the basis of aforesaid, it was contended that the entire expenditure was allowable while computing the income of the assessee. The ld. Counsel for the assessee specifically pointed out that that the visits to Bhuj and Bhavnagar were undertaken to facilitate relief work on the aftermath of earthquake. The expenditure is to be seen as incurred by the assessee as cost of social obligation. In support, reliance was placed on the following decisions :—

(i) CIT v. Madras Refineries Ltd. [2004] 266 ITR 170 ¹

(ii) Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. CIT [1988] 172 ITR 131 ² (MP);

(iii) Hindustan Petroleum Corpn. Ltd. v. Dy. CIT [2005] 96 ITD 186 ³ (Mum.).

22. On the other hand, the ld. D.R. has defended the orders of the lower authorities by placing reliance on the same.

23. We have carefully considered the submissions of both the parties. After perusing the details and the purpose for which the expenditure has been incurred, in our opinion, the case of the assessee cannot be shut out in entirety. In relation to the trips to Delhi-Tirupati and Guna, no purpose has been stated by the assessee even in the details filed before us. Therefore, the disallowance to that extent is justified. As regards other trips, except to Bhuj and Bhavnagar, we see no reason to disallow the same as the purposes mentioned are such so as to qualify the tests laid down under section 37(1) of the Act. Regarding trips to Bhuj and Bhavnagar, the justification is that consequent to earthquake, the expenditure was incurred for undertaking relief work, taken up as a social cause though not directly connected with the business of the assessee. In this context, going by the parity of reasoning weighing with the Hon’ble Madras High Court in the cases of Madras Refineries Ltd. (supra) and Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. (supra), the expenditure is allowable as a deduction. We therefore, set aside order of the CIT(A) and direct the Assessing Officer to rework the disallowance in the aforesaid manner. The assessee partly succeeds on this ground.

24. In Ground No. 3, the issue is with regard to the premium payable to mutual fund which has been treated as income under section 28(iv) of the Act. The said ground has not been pressed on behalf of the assessee in the course of hearing. Accordingly, the same is dismissed as not pressed.

25. Ground No. 4 is in relation to the denial of depreciation on hydraulic excavator amounting to Rs. 27,71,704. On this aspect, the Assessing Officer noted that the assessee had purchased two excavators as under :—

(i)Tata Hitachi EX-600 V Hydraulic Excavator for Rs. 1,10,74,752 vide bill dated 27-2-2001.

(ii)Hyderabad Excavator H-55 for Rs. 1,10,98,880 vide bill dated 30-3-2001.

Depreciation was claimed at half of the normal depreciation allowable on such assets since they were put to use for a period of less than 180 days. The Assessing Officer disallowed the depreciation on the ground that the assessee failed to substantiate that the asset was put to use for the purposes of business during the previous year itself. The CIT(A) has also sustained the stand of the Assessing Officer.

26. The plea of the assessee is that the excavators are heavy vehicles used in grinding operations for the purposes of excavation and do not require any installation and are put to use for the purposes of business as soon as the vehicle is bought and put on road. It was explained that first excavator was purchased on 17-2-2001 and entered the premises of the assessee on 16-3-2001 and the second excavator was, purchased on 30-3-2001 and entered the premises of the assessee on the same day. These facts were borne out from store receipts/reports which are placed in the paper book. The ld. Counsel for the assessee submitted that the assessee had also submitted certificate in this regard before the lower authorities.

27. On the other hand, the ld. D.R. has relied upon the order of the lower authorities in support of the case of the Revenue.

28. After considering the rival pleas on this issue and the material on record. We find that the issue in question is squarely covered by the decision of the Special Bench on of the Tribunal in the case of KCP Ltd. v. ITO [1991] 38 ITD 15 (Hyd.) wherein under similar situation depreciation was held as allowable. The Tribunal specifically noted that an excavator is a machine ready to be put to use just like a car is ready to be driven. Further, even in cases where an asset is kept ready for use, as a passive user, the depreciation in terms of section 32 has been held to be allowable. In this regard, a reference can be made to the decision of the Hon’ble Delhi High Court in the case of Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404¹. Following the aforesaid discussion, in our view, the claim of the assessee is in accordance with law and is thus allowable. We set aside order of the CIT(A) and direct the Assessing Officer to allow the claim of the assessee for depreciation amounting to Rs. 27,71,704. The assessee succeeds on this ground.

29. In ground No. 5, the grievance of the assessee is against order of the CIT(A) in confirming the action of the Assessing Officer whereby depreciation has been allowed on turbines to the extent of Rs. 1,59,10,047 as against Rs. 2,85,37,634 claimed by the assessee. The variation in depreciation has resulted for the reason that the Assessing Officer held that the assessee is entitled to depreciation on straight line method and not on written down value basis as claimed by the assessee.

30. In this context, it was a common ground between the parties that the issue in question is covered by the decision of the Tribunal in assessee’s own case for the assessment year 2000-01, order dated 31-3-2006 in I.T.A. No. 3663/Delhi/05, in favour of the assessee. In view of the aforesaid decision of the Tribunal, the assessee succeeds on this ground.

31. In the result, whereas the appeal of the Revenue is dismissed, the appeal of the assessee is partly allowed.