The Supreme Court of India in Commissioner of Income Tax v. M/s Jindal Steel & Power Limited (2023 INSC 1053) examined the correct method for computation of deduction under Section 80-IA of the Income Tax Act, 1961, particularly in cases involving captive power generation units supplying electricity to the assessee’s own industrial units.

The principal issue before the Court was whether the “market value” of electricity for the purpose of Section 80-IA(8) should be taken as the rate at which surplus electricity was supplied by the assessee to the State Electricity Board under a power purchase agreement, or the rate at which electricity was supplied by the State Electricity Board to industrial consumers, including the assessee.

The Assessing Officer had recomputed the deduction by adopting the lower tariff payable by the State Electricity Board for surplus electricity supplied by the assessee, treating it as the market value. This resulted in a reduction of the profits of the eligible business and consequently the deduction under Section 80-IA. The Income Tax Appellate Tribunal set aside this approach, holding that the tariff charged by the State Electricity Board to industrial consumers represented the true market value. The High Courts affirmed this view.

Upholding the decisions of the Tribunal and the High Courts, the Supreme Court held that the price fixed under a power purchase agreement for compulsory sale of surplus electricity to the State Electricity Board is a contracted price determined under statutory and regulatory constraints and does not reflect a price discovered in an open market. Such a rate cannot be equated with “market value” as contemplated under Section 80-IA(8).

The Court clarified that “market value” refers to the price that goods would ordinarily fetch in an open market governed by free competition, demand, and supply. In the context of electricity supplied for captive consumption, the appropriate benchmark is the tariff at which the State Electricity Board supplies electricity to industrial consumers, since that represents the price payable by a consumer in the open market.

Accordingly, the Supreme Court held that the profits of the eligible business were correctly computed by adopting the consumer tariff charged by the State Electricity Board and that the recomputation made by the Assessing Officer was legally unsustainable. The appeals filed by the revenue were dismissed.

Source Link - https://api.sci.gov.in/supremecourt/2009/12634/12634_2009_13_1501_48814_Judgement_06-Dec-2023.pdf

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