Supreme Court clarifies deduction under Section 80IA of Income Tax Act: Jindal Steel & Power Ltd. vs. Commissioner of Income Tax (2023)

Introduction

Date of the Judgment: 06 December 2023

Citation: 2023 INSC 1053

Judges: B.V. Nagarathna, J. and Ujjal Bhuyan, J.

Can the price at which a company sells surplus electricity to the State Electricity Board be considered the ‘market value’ when calculating deductions under Section 80IA of the Income Tax Act? The Supreme Court of India recently addressed this question, focusing on how to fairly compute profits from captive power generation. The core issue revolved around whether the rate at which a company sells surplus power to the State Electricity Board should be the benchmark for calculating deductions, or if the rate at which the State Electricity Board sells power to industrial consumers should be considered the market value. The judgment was delivered by a two-judge bench comprising Justice B.V. Nagarathna and Justice Ujjal Bhuyan, with the majority opinion authored by Justice Ujjal Bhuyan.

Case Background

M/s Jindal Steel and Power Ltd. (the assessee), a public limited company, was engaged in the business of generating electricity and manufacturing steel. The assessee established captive power generating units to meet its industrial units’ electricity needs, as the supply from the State Electricity Board was insufficient. Surplus power was sold to the State Electricity Board. For the assessment year 2001-2002, the assessee claimed deductions under Section 80IA of the Income Tax Act, 1961, relating to profits from its power-generating units. The assessee supplied power to its industrial units at Rs. 3.72 per unit, while it sold surplus power to the State Electricity Board at Rs. 2.32 per unit. The assessing officer found that the assessee had inflated profits by showing a higher rate for internal consumption than the rate at which it sold to the State Electricity Board. The assessing officer recomputed the deduction, using Rs. 2.32 per unit as the market value of electricity, which was the rate at which the assessee sold the surplus power to the State Electricity Board.

Timeline

Course of Proceedings

The assessing officer’s decision to recompute the deduction under Section 80IA was challenged by the assessee before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the assessing officer’s decision. The assessee then appealed to the Income Tax Appellate Tribunal, Delhi, which ruled in favor of the assessee, stating that the price at which the assessee supplied power to its own units (Rs. 3.72 per unit) was the market value. The revenue appealed to the High Court of Punjab and Haryana, which upheld the Tribunal’s decision, noting that the issue was already covered by a previous decision against the revenue. Aggrieved by the High Court order, the revenue filed appeals before the Supreme Court.

Legal Framework

The core legal framework for this case includes:

• Section 80IA of the Income Tax Act, 1961: This section provides deductions for profits and gains from industrial undertakings engaged in infrastructure development, including power generation. Specifically, sub-section (8) of Section 80IA states that if goods are transferred between different businesses of the same assessee, the transfer should be at market value. The explanation to this sub-section defines “market value” as the price goods would fetch in the open market.
  
  “Where any goods held for the purposes of the eligible business are transferred to any other business carried on by the assessee…the profits and gains of such eligible business shall be computed as if the transfer…had been made at the market value of such goods as on that date… ‘market value’, in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market.”
• Electricity (Supply) Act, 1948: This act governs the generation and distribution of electricity. Section 43 empowers the State Electricity Board to purchase surplus electricity from producers within the state. Section 43A allows generating companies to contract with the State Electricity Board for the sale of electricity.
  
  Section 43: “The Board may enter into arrangements with any person producing electricity within the State for the purchase by the Board on such terms as may be agreed upon of any surplus electricity which that person may be able to dispose of.”

Arguments

Appellant (Revenue) Arguments:

• The assessee deliberately inflated profits by showing a higher rate (Rs. 3.72 per unit) for internal consumption of electricity than the rate at which it sold surplus power to the State Electricity Board (Rs. 2.32 per unit), to claim higher deductions under Section 80IA of the Income Tax Act, 1961.
• The rate at which the assessee sold surplus power to the State Electricity Board (Rs. 2.32 per unit) was the true market value of electricity because the agreement was voluntarily entered into by both parties.
• The definition of “market value” in Section 80IA(8) should be interpreted reasonably, and the price at which the State Electricity Board purchased power from the assessee should be considered the market value.
• The State Electricity Board’s rate of Rs. 3.72 per unit includes distribution losses, infrastructure expenses, subsidies, and administrative costs, and is not a true reflection of market value.
• The power purchase agreement between the assessee and the State Electricity Board was a statutory arrangement, and the price paid by the State Electricity Board should be treated as the market value.
• Relied on the Calcutta High Court’s decision in Commissioner of Income Tax Vs. I.T.C. Limited, arguing that the benefit under Section 80IA should be based on rates fixed by the tariff regulatory commission or, in this case, the power purchase agreement.

Respondent (Assessee) Arguments:

• The price at which the State Electricity Board purchased surplus power from the assessee (Rs. 2.32 per unit) was not the market value because it was a contracted price under a power purchase agreement, and the assessee had no option but to sell to the State Electricity Board.
• The market value should be the price at which electricity is available in the open market, and, in this case, the rate at which the State Electricity Board sold power to industrial consumers (Rs. 3.72 per unit).
• The State Electricity Board had a monopoly on power distribution, and the assessee was compelled to sell surplus power to them at the rate fixed by the agreement.
• The transfer of power between the assessee’s power plants and industrial units should be at arm’s length, which means the price should be as if between unrelated parties in an uncontrolled condition.
• The assessee was maintaining separate accounts for its power generation and industrial units and recorded the transfer of power at the rate at which electricity was sold by the State Electricity Board to industrial consumers.
• Cited Circular No.169 of the Central Board of Direct Taxes (CBDT), contending that Section 80IA(8) requires computation of profits at the price goods would fetch on sale in the open market.

[TABLE] showing the sub-submissions categorized by main submissions:

Innovativeness of the argument: The assessee’s argument that the rate at which the State Electricity Board sold power to consumers should be considered the market value, rather than the rate at which it purchased power from the assessee, was a novel approach to interpreting the term “open market” in the context of Section 80IA of the Income Tax Act, 1961.

Issues Framed by the Supreme Court

The Supreme Court addressed the following core issue:

1. Whether the recomputation of deduction under Section 80IA of the Income Tax Act, 1961, by the assessing officer was justified, specifically concerning the determination of market value for electricity generated by captive power plants.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• M/s Printers House Private Limited Vs. Mst. Saiyadan, (1994) 2 SCC 133 – Supreme Court of India: This case was cited to emphasize that the market value of a thing is determined by the price a willing vendor might expect from a willing purchaser.
• CIT Vs. GR Govindarajulu, (2016) 16 SCC 335 – Supreme Court of India: This case was cited to support the view that the law does not mention any specific mode of exercising an option, and exercising the option before filing the return is sufficient.
• Commissioner of Income Tax Vs. I.T.C. Limited, (2015) 64 Taxman.com 214 – Calcutta High Court: This case was distinguished as it was based on different facts and a different statutory regime.

Legal Provisions:

• Section 80IA of the Income Tax Act, 1961: This section allows deductions for profits and gains from industrial undertakings or enterprises engaged in infrastructure development.
  
  Sub-section (8): Specifies that transfers between eligible businesses of the same assessee should be at market value.
  
  Explanation to Sub-section (8): Defines market value as the price goods would fetch on sale in the open market.
• Section 32(1) of the Income Tax Act, 1961: This section provides for depreciation on assets.
• Section 11 of the Income Tax Act, 1961: This section deals with income from property held for charitable or religious purposes, cited in the case of CIT Vs. GR Govindarajulu.
• Section 43 of the Electricity (Supply) Act, 1948: Empowers the State Electricity Board to purchase surplus electricity from producers within the state.
• Section 43A of the Electricity (Supply) Act, 1948: Allows generating companies to contract with the State Electricity Board for the sale of electricity.
• Rule 5(1) and (1A) of the Income Tax Rules, 1962: These rules provide the method for calculating depreciation.
  
  Rule 5(1): Provides for depreciation on the written down value (WDV) of assets.
  
  Rule 5(1A): Provides for depreciation on the actual cost of assets, with an option to choose WDV depreciation.
• Appendix I and IA of the Income Tax Rules, 1962: These appendices provide tables of rates at which depreciation is admissible.

[TABLE] of Authorities Considered by the Court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• M/s Printers House Private Limited Vs. Mst. Saiyadan [CITATION]: The principle of market value being the price a willing vendor would get from a willing purchaser was noted, but the court clarified that the situation in this case was not one of a willing vendor and purchaser in an open market.
• CIT Vs. GR Govindarajulu [CITATION]: The principle that the law does not mention any specific mode of exercising an option, and exercising the option before filing the return is sufficient, was followed.
• Commissioner of Income Tax Vs. I.T.C. Limited [CITATION]: This case was distinguished due to different facts and a different statutory regime.
• Section 80IA of the Income Tax Act, 1961: The court interpreted sub-section (8) and its explanation to conclude that the market value should be the price in an open market, which was the rate at which the State Electricity Board sold to consumers.
• Section 43 and 43A of the Electricity (Supply) Act, 1948: The court interpreted these sections to understand the statutory framework for electricity purchase and sale, noting the State Electricity Board’s dominant position.
• Rule 5(1) and (1A) of the Income Tax Rules, 1962: The court interpreted these rules to conclude that no specific mode of exercising an option for depreciation was required.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Definition of “Open Market”: The Court emphasized that the term “open market,” as used in the explanation to Section 80IA(8) of the Income Tax Act, 1961, implies a market where prices are determined by free competition and the laws of supply and demand. The court noted that the sale of surplus electricity by the assessee to the State Electricity Board was not in such an open market environment.
• Dominant Position of State Electricity Board: The Court recognized that the State Electricity Board had a monopoly in the generation and distribution of electricity. The assessee was compelled to sell surplus power to the State Electricity Board at a rate fixed by the Board, which was not a result of a competitive environment.
• Market Value for Industrial Consumers: The Court reasoned that if the assessee’s industrial units had to purchase electricity from the State Electricity Board, they would have to pay the rate at which the Board supplied to industrial consumers (Rs. 3.72 per unit). Therefore, this rate should be considered the market value for the purpose of computing deductions under Section 80IA.
• Arm’s Length Pricing: The Court noted that the transfer of electricity between the assessee’s power plants and industrial units should be at arm’s length, meaning the price should be as if between unrelated parties in an uncontrolled condition.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio Table:

Logical Reasoning:

The Supreme Court considered alternative interpretations, including the revenue’s argument that the price at which the assessee sold surplus power to the State Electricity Board should be considered the market value. However, the Court rejected this interpretation because it was not a price determined in an open market environment. The Court concluded that the rate at which the State Electricity Board sold power to industrial consumers (Rs. 3.72 per unit) was the true market value for the purpose of computing deductions under Section 80IA of the Income Tax Act, 1961.

The Court’s decision was based on the interpretation of the term “open market” in the context of Section 80IA(8) of the Income Tax Act, 1961, and the recognition that the State Electricity Board had a monopoly in the generation and distribution of electricity.

“market value”, in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market.

It is determined in an environment where one of the players has the compulsive legislative mandate not only in thegeneration of electricity but also in its distribution. Therefore, the price at which the State Electricity Board is purchasing the surplus electricity cannot be considered to be the market value.

Holding

The Supreme Court held that the market value of electricity, for the purpose of calculating deductions under Section 80IA of the Income Tax Act, 1961, should be the rate at which the State Electricity Board supplied power to industrial consumers (Rs. 3.72 per unit), and not the rate at which the assessee supplied surplus power to the State Electricity Board (Rs. 2.32 per unit). The Court dismissed the civil appeals filed by the revenue. The decision of the High Court of Punjab and Haryana was upheld.

Ratio Decidendi

The core principle of law on which the Supreme Court’s decision is based is that the term “market value” in Section 80IA(8) of the Income Tax Act, 1961, refers to the price that goods would fetch in an open market, where prices are determined by free competition and the laws of supply and demand. The price at which a company sells surplus electricity to a State Electricity Board, which has a monopoly in the generation and distribution of electricity, cannot be considered the market value. Instead, the market value should be the price at which the State Electricity Board sells electricity to industrial consumers, as this is the price that would be determined in an open market environment.

Obiter Dicta

The Supreme Court made the following observations:

• The Court emphasized that the transfer of power between the assessee’s power plants and industrial units should be at arm’s length, meaning the price should be as if between unrelated parties in an uncontrolled condition.
• The Court noted that the price at which the State Electricity Board purchased surplus power from the assessee was a contracted price, and the assessee had no option but to sell to the State Electricity Board at the rate fixed by the agreement.
• The Court clarified that the market value is not the price paid by the State Electricity Board but the price at which electricity is sold to industrial consumers.

Impact of the Judgment

The Supreme Court’s judgment has significant implications for companies that generate captive power and claim deductions under Section 80IA of the Income Tax Act, 1961. The key impacts include:

• Clarity on “Market Value”: The judgment provides clarity on how to determine the “market value” of electricity generated by captive power plants for the purpose of computing deductions under Section 80IA. It clarifies that the price at which the State Electricity Board purchases surplus power from the assessee is not the market value.
• Benefit to Assessees: The judgment benefits assessees by allowing them to claim deductions based on the rate at which the State Electricity Board sells power to industrial consumers, which is generally higher than the rate at which the State Electricity Board purchases surplus power.
• Precedent for Similar Cases: The judgment sets a precedent for similar cases involving the computation of deductions under Section 80IA, where the issue is the determination of market value for goods transferred between different businesses of the same assessee.
• Implications for State Electricity Boards: The judgment indirectly impacts State Electricity Boards by recognizing their dominant position in the generation and distribution of electricity.

Critical Analysis

Strengths of the Judgment:

• Consistent with “Open Market” Principle: The judgment correctly interprets the term “open market” in Section 80IA(8) of the Income Tax Act, 1961, by recognizing that the price at which the State Electricity Board purchases surplus power is not the result of free competition.
• Fair to Assessees: The judgment is fair to assessees by allowing them to claim deductions based on the rate at which the State Electricity Board sells power to industrial consumers, which is a more accurate reflection of the market value.
• Recognizes Monopoly of State Electricity Boards: The judgment recognizes the dominant position of the State Electricity Boards in the generation and distribution of electricity and the fact that assessees have no option but to sell surplus power to them at the rate fixed by the Board.
• Promotes Arm’s Length Pricing: The judgment promotes arm’s length pricing by emphasizing that the transfer of electricity between the assessee’s power plants and industrial units should be at a price as if between unrelated parties in an uncontrolled condition.

Weaknesses of the Judgment:

• Complexity of Implementation: The judgment may be complex to implement in practice, as it requires a detailed analysis of the rates at which the State Electricity Board sells power to industrial consumers, which may vary depending on the type of consumer and the time of day.
• Potential for Disputes: The judgment may lead to disputes between assessees and tax authorities regarding the determination of the market value of electricity, particularly in cases where the State Electricity Board has different rates for different types of consumers.
• Limited Scope: The judgment is limited to the specific facts of the case and may not be applicable in all situations involving the computation of deductions under Section 80IA of the Income Tax Act, 1961.

[TABLE] of Strengths and Weaknesses:

Conclusion

The Supreme Court’s judgment in the case of Jindal Steel & Power Ltd. vs. Commissioner of Income Tax (2023) provides important clarity on how to determine the market value of electricity generated by captive power plants for the purpose of computing deductions under Section 80IA of the Income Tax Act, 1961. The Court held that the market value should be the rate at which the State Electricity Board sells power to industrial consumers, and not the rate at which the assessee sells surplus power to the State Electricity Board. This decision is based on the principle that “market value” implies a price determined in an open market environment, and the fact that State Electricity Boards have a monopoly in the generation and distribution of electricity. The judgment has significant implications for companies that generate captive power and claim deductions under Section 80IA of the Income Tax Act, 1961, and sets a precedent for similar cases involving the computation of deductions under Section 80IA.