High Court rules sugar company can claim tax deduction for single power unit despite consolidated accounts

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Case Name

Commissioner of Income Tax Vs. Bannari Amman Sugars Limited (High Court of Madras)

T.C.(A).No.1045 of 2009

Date: 28th January 2019

Key Takeaways

• Companies with multiple eligible units can choose to claim Section 80-IA (of Income Tax Act, 1961) deduction for individual units rather than being forced to combine all units
• Having consolidated financial statements doesn’t automatically disqualify a company from claiming unit-specific deductions
• Each power generation unit with separate Power Purchase Agreements (PPAs) can be treated as distinct undertakings
• The provisions of Section 80IB(5) (of Income Tax Act, 1961) support treating eligible businesses independently for deduction purposes

Issue

The central legal questions were:

1. Whether a company with multiple industrial undertakings can claim Section 80-IA (of Income Tax Act, 1961) deduction for a single unit or must include all units together?
2. Whether the company was entitled to exemption for its Karnataka unit despite maintaining combined financial accounts for all businesses?

Facts

Bannari Amman Sugars Limited operates three power generation units:

• Two units in Karnataka (16 MW and 20 MW capacity)
• One unit in Tamil Nadu (20 MW capacity)

In Assessment Year 2004-05, the company claimed a Section 80-IA (of Income Tax Act, 1961) deduction for the first time, but only for the 16 MW Karnataka unit, showing profits of Rs.16,71,52,433. The Assessing Officer made some adjustments, setting off prior year losses of Rs.2,53,93,558, bringing the eligible profit down to Rs.14,17,58,875.

The Assessing Officer then went ahead and set off losses from the other two units (the 20 MW Karnataka unit and the Tamil Nadu unit) against the profits of the eligible 16 MW unit. After this adjustment, there were no positive profits left, so no deduction was allowed.

Arguments

Company’s Position:

The company argued that they had specifically claimed the deduction only for the 16 MW Karnataka unit, and the other two were just co-generation units for which no deduction was claimed. They maintained that there was no justification for setting off losses from the other units against the profits of the eligible unit.

Tax Department’s Position:

The tax authorities pointed out that the company had filed consolidated balance sheets and profit & loss accounts for the entire entity. The CIT(A) concluded that the company hadn’t proven that it operated three separate and identifiable undertakings. They also argued that the co-generation units were set up captively only to meet power shortages for the sugar manufacturing units, not as separate power generation businesses.

Key Legal Precedents

The court referenced several important cases:

1. Velayudhaswamy Spinning Mills § Ltd. v. Assistant Commissioner of Income-Tax (340 ITR 477, affirmed by Supreme Court in (2017) 244 Taxmann 58) - This dealt with how prior year losses should be handled in Section 80-IA (of Income Tax Act, 1961) calculations.
2. Commissioner of Income Tax v. Dewan Kraft System § Ltd. (297 ITR 305 (Del)) - The Tribunal followed this Delhi High Court judgment, which held that Section 80-IA (of Income Tax Act, 1961) provisions apply only to the specific unit claiming deduction.
3. Synco Industries Ltd. v. Assessing Officer, Income-Tax, Mumbai (299 ITR 444) - This Supreme Court case was cited by the Department, but the court distinguished it as it dealt with multiple eligible units under Chapter VIA, whereas here only one unit was claiming the deduction.
4. Chettinad Cement Corporation Ltd. V. ACIT - The CIT(A) applied this Tribunal decision to argue that only separate undertakings for power generation would be entitled to deduction, not captive power plants.

Judgement

The High Court ruled in favor of Bannari Amman Sugars Limited. Here’s their reasoning:

The court found that the Tribunal was correct in its decision. Key points of the judgment:

1. Separate Power Purchase Agreements: The court noted that independent Power Purchase Agreements had been entered into for each unit with different electricity boards - Karnataka Power Transmission Corporation Ltd. and Tamil Nadu Electricity Board. The terms and conditions in each PPA were different and distinct.
2. Consolidated Accounts Don’t Disqualify: The mere fact that consolidated financials were prepared for the entire business wouldn’t prevent the company from claiming deduction for one undertaking of its choice. The company had maintained separate statements detailing separate project costs and sources of finance for each unit.
3. Section 80IB(5) (of Income Tax Act, 1961) Interpretation: The court emphasized that Section 80IB(5) (of Income Tax Act, 1961) provides that in determining the quantum of deduction under Section 80IA (of Income Tax Act, 1961), the eligible business shall be treated as the only source of income. This means each unit, including a CPP (Captive Power Plant), has to be seen independently as separate and distinct from each other.
4. Distinguished Synco Industries Case: The court clarified that the Supreme Court’s decision in Synco Industries Ltd. wouldn’t apply here because that case involved multiple units all eligible for Chapter VIA deductions, whereas here the claim was restricted only to the 16 MW Karnataka unit.

The appeal was dismissed, and the questions of law were answered in favor of the assessee.

FAQs

Q1: Can a company with multiple power units choose which unit to claim Section 80-IA (of Income Tax Act, 1961) deduction for?

A: Yes, based on this judgment, a company can choose to claim the deduction for a specific unit rather than being forced to combine all units, provided each unit operates independently with separate agreements.

Q2: Does having consolidated financial statements prevent claiming unit-specific deductions?

A: No, the court clearly stated that consolidated financials alone don’t disqualify a company from claiming deduction for individual undertakings, especially when separate project details are maintained.

Q3: What makes power units “separate and distinct” for tax purposes?

A: Key factors include having separate Power Purchase Agreements with different terms, separate project costs, separate sources of finance, and the ability to operate independently.

Q4: How does Section 80IB(5) (of Income Tax Act, 1961) affect the calculation of deductions?

A: Section 80IB(5) (of Income Tax Act, 1961) requires that the eligible business be treated as the only source of income during the relevant period, which supports treating each unit independently rather than combining them.

Q5: What was the significance of the Synco Industries case distinction?

A: The court distinguished this case because Synco Industries involved multiple units all claiming Chapter VIA deductions, while here only one specific unit was claiming the deduction, making the legal principles different.

Revenue has filed this appeal under Section 260A (of Income Tax Act, 1961) (in short, 'the Act') aggrieved by order dated 16.03.2009, passed by the Income Tax Appellate Tribunal, (in short, 'Tribunal') in respect of Assessment Year 2004-2005.

2. The substantial questions of law framed for determination in this appeal are as follows :

“(1) Whether in the case where a company engaged apart from its regular business in the business of generation and distribution of power, owning more than one industrial undertaking, deduction under Section 80 (of Income Tax Act, 1961)-1A of the Act is to be allowed to single industrial unit or to all the units taken together ?

(2) Whether the Tribunal was right in holding that for the purpose of computing deduction under Section 80 (of Income Tax Act, 1961)-1A, the assessee was entitled to exemption in respect of the unit situated in Karnataka for which claim was made even though only combined profit and loss account and balance sheet in respect of all business was maintained?

3. The admitted facts are that the respondent-assessee

operates three units engaged in the manufacture and sale of

sugar: two units situated at Karnataka with a capacity of 16 and

20 MW respectively and the third unit at Tamil Nadu with a

capacity of 20 MW. A claim was made under section Section 80 (of Income Tax Act, 1961)-1A

of the Act for the first time in respect of the 16 MW unit

situated at Karnataka in AY 2004-05 in respect of profits

amounting to Rs.16,71,52,433/-. The Assessing Officer, in

quantifying the profits, set off the losses incurred in the

prior years amounting to Rs.2,53,93,558/- against the profits,

arriving at a figure of Rs.14,17,58,875/- as profits of the

unit.

4. Though this Court, in Velayudhaswamy Spinning Mills (P)

Ltd. v. Assistant Commissioner of Income-Tax, (reported in 340

ITR 477 and since affirmed by the Supreme Court in (2017) 244

Taxmann 58), has taken the view that the losses suffered in the

years prior to the initial year that have been set off against

the profits in the respective years should not be carried

forward notionally and set off again against the eligible

profits of later years, it appears that the assessee has not

challenged this adjustment made to the profits for AY 2004-05

and, as such, this adjustment stands.

5. Further, the Assessing Officer proceeded to set off the

losses suffered by the units at Karnataka (20 MW) and Tamil Nadu

against the profits earned by the eligible unit coming to the

conclusion that the assessee had no positive profits after such

set off and, as such, no deduction was liable to be granted

under Section 80 (of Income Tax Act, 1961)-1A of the Act.

6. The Commissioner of Income Tax (Appeals) before whom the

assessee filed an appeal challenging the order of assessment

dismissed the same. The argument of the assessee was that it had

claimed the deduction only in regard to the 16 MW unit at

Karnataka ('eligible unit') and the other two units were only

co-generation units in respect of which no deduction had been

claimed. Thus, there was no question, according to the assessee,

of setting off the losses of the two units against the profits

of the eligible unit. The CIT(A) found from the record that the

return of income filed by the assessee had been accompanied by a

consolidated balance sheet and profit and loss account for the

entity as a whole. Thus, according to him, the assessee had not

substantiated its submission that it owned and managed three

separate and identifiable undertakings, generating power. He

noticed that no evidence had been produced by the assessee in

respect of its claim that there existed separate undertakings

and even in the depreciation statement filed along with the tax

audit report, depreciation in respect of the co-generation units

was included as part of the block of assets.

7. The CIT(A) further notes that at the time of appellate

proceedings, figures relating to unit wise bifurcation in

relation to the three units were furnished before him. He

concluded that the co-generation units had been set up captively

only to meet the power shortages faced by the various sugar

manufacture units. Applying the order of the Income Tax

Appellate Tribunal, Madras in the case of Chettinad Cement

Corporation Ltd. V. ACIT, he concluded that only a separate

undertaking set up for the generation or generation and

distribution of power would be entitled to the deduction claimed

and not a captive power plant set up by an undertaking to meet

power shortages to maintain its own industry. He noted that the

20 MW units at Tamil Nadu and Karnataka had been set up only to

boost power generation for their own sugar industry and only the

surplus, after captive consumption, had been sold. Such

undertakings, according to him, could not be treated as separate

undertakings for the purpose of deduction under Section 80 (of Income Tax Act, 1961) I

(A).

8. In this view of the matter he negated the submission of

the assessee that the units were to be considered as separate

units and concluded that all units were to be clubbed as a

single generation unit. In fine, the assessee's appeal was

dismissed as against which the assessee approached the Tribunal

in second appeal.

9. The Tribunal, following the judgment of the Delhi High

Court in the case of Commissioner of Income Tax v. Dewan Kraft

System (P) Ltd., 297 ITR 305 (Del), held that the provisions of

Section 80 (of Income Tax Act, 1961)-1A of the Act would stand attracted only in the case

of the specific unit claiming deduction and, as such, the action

of the lower authorities in clubbing the profit and loss of the

three units would not be tenable. Accordingly, the orders of the

lower authorities were reversed by the Tribunal, as against

which, the present appeal has been filed by the Revenue.

10. We have heard Mr.T.R.Senthil Kumar, learned Senior

Standing Counsel for the appellant/Revenue; and

Mr.R.Vijayaraghavan, learned counsel for the respondent/Assessee.

11. The Tribunal has found as a fact that independent Power

Purchase Agreements (PPA) in respect of each unit have been

entered into by the assessee with the Karnataka Transmission

Limited and Tamil Nadu Electricity Board respectively, being i)

Power Purchase Agreement with Karnataka Power Transmission

Corporation Ltd. dated 25.09.2000 for 16 MW Co-generation Plant

situated at Alaganchi, Mysore District, ii) Power Purchase

Agreement with Tamil Nadu Electricity Board dated 24.04.2002 for

20 MW Co-generation Plant situated at Alathukombai, Erode

District and iii) Power Purchase Agreement with Karnataka Power

Transmission Corporation Ltd dated 11.03.2004 for 20 MW Co-

generation Plant situated at Alaganchi, Mysore District.

12. The terms and conditions contained in each PPA are

different and distinct from each other. Thus the mere fact that

consolidated financials have been prepared for the entire

business would not disentitle the assessee from claiming

deduction under section 80IA (of Income Tax Act, 1961) in respect of the one undertaking

of its choice. In fact, separate statements have been maintained

by the assessee and filed before the Commissioner of Income Tax

(Appeals) detailing separate project cost and source of finance

in respect of each unit. The assessee has categorically

exercised its claim before the Assessing Officer for deduction

under section 80IA (of Income Tax Act, 1961) in respect of only the 16 MW unit at

Karnataka.

13. We may, at this juncture, usefully refer to the

provisions of section 80IB(5) (of Income Tax Act, 1961) which provides that in

determining the quantum of deduction under section 80IA (of Income Tax Act, 1961), the

eligible business shall be treated as the only source of income

of the assessee during the previous year relevant to the initial

assessment year and to every subsequent assessment year upto and

including the assessment year for which the determination is to

be made. There is thus no doubt that each unit, including a

CPP, has to be seen independently as separate and distinct from

each other and as units for the purposes of grant of deduction

under section 80IA (of Income Tax Act, 1961).

14. Coming to the computation itself, reliance is placed by

the Department on a judgment of the Supreme Court in the case of

Synco Industries Ltd. v. Assessing Officer, Income-Tax, Mumbai

(299 ITR 444). The Supreme Court was considering the case of an

assessee managing multiple units, some earning a profit and

others, losses. The question before the Bench was whether the

losses suffered by the eligible oil division ought to be

adjusted against the profits of the chemical division in

finalizing the grant of deduction under Section 80I (of Income Tax Act, 1961).

After considering the provisions of Section 80I (of Income Tax Act, 1961), 80A (of Income Tax Act, 1961), 80AB (of Income Tax Act, 1961) and

80B, the Bench holds as follows:

12. The contention that under Section 80-I(6) (of Income Tax Act, 1961) the

profits derived from one industrial undertaking cannot

be set off against loss suffered from another and the

profit is required to be computed as if profit making

industrial undertaking was the only source of income,

has no merits. Section 80-I(1) (of Income Tax Act, 1961) lays down that where

the gross total income of the assessee includes any

profits derived from the priority

undertaking/unit/division, then in computing the total

income of the assessee, a deduction from such profits

of an amount equal to 20% has to be made. Section 80-I (of Income Tax Act, 1961)

(1) lays down the broad parameters indicating

circumstances under which an assessee would be entitled

to claim deduction. On the other hand Section 80-I(6) (of Income Tax Act, 1961)

deals with determination of the quantum of deduction.

Section 80-I(6) (of Income Tax Act, 1961) lays down the manner in which the

quantum of deduction has to be worked out. After such

computation of the quantum of deduction, one has to go

back to Section 80-I(1) (of Income Tax Act, 1961) which categorically states

that where the gross total income includes any profits

and gains derived from an industrial undertaking to

which Section 80-I (of Income Tax Act, 1961) applies then there shall be a

deduction from such profits and gains of an amount

equal to 20%. The words "includes any profits'' used by

the legislature in Section 80-I(1) (of Income Tax Act, 1961) are very important

which indicate that the gross total income of an

assessee shall include profits from a priority

undertaking. While computing the quantum of deduction

under Section 80-I(6) (of Income Tax Act, 1961) the Assessing Officer, no doubt,

has to treat the profits derived from an industrial

undertaking as the only source of income in order to

arrive at the deduction under Chapter VI-A. However,

this Court finds that the non-obstante clause appearing

in Section 80-I(6) (of Income Tax Act, 1961), is applicable only to

the quantum of deduction, whereas, the gross total

income under Section 80B(5) (of Income Tax Act, 1961) which is also referred to

in Section 80I(1) (of Income Tax Act, 1961) is required to be computed in the

manner provided under the Act which presupposes that

the gross total income shall be arrived at after

adjusting the losses of the other division against the

profits derived from an industrial undertaking. If the

interpretation as suggested by the appellant is

accepted it would almost render the provisions of

Section 80A(2) (of Income Tax Act, 1961) nugatory and therefore the

interpretation canvassed on behalf of the appellant

cannot be accepted. It is true that under Section 80-I (of Income Tax Act, 1961)

(6) for the purpose of calculating the deduction, the

loss sustained in one of the units, cannot be taken

into account because Sub-Section 6 (of Income Tax Act, 1961) contemplates that

only the profits shall be taken into account as if it

was the only source of income. However, Section 80A(2) (of Income Tax Act, 1961)

and Section 80B(5) (of Income Tax Act, 1961) are declaratory in nature. They

apply to all the Sections falling in Chapter VI-A. They

impose a ceiling on the total amount of deduction and

therefore the non-obstante clause in Section 80-I(6) (of Income Tax Act, 1961)

cannot restrict the operation of Sections 80A(2) and

80B(5) which operate in different spheres. As observed

earlier Section 80-I(6) (of Income Tax Act, 1961) deals with actual computation

of deduction whereas Section 80 (of Income Tax Act, 1961)- I(1) deals with the

treatment to be given to such deductions in order to

arrive at the total income of the assessee and

therefore while interpreting Section 80-I(1) (of Income Tax Act, 1961), which

also refers to gross total income one has to read the

expression 'gross total income' as defined in Section

80B(5). Therefore, this Court is of the opinion that

the High Court was justified in holding that the loss

from the oil division was required to be adjusted

before determining the gross total income and as the

gross total income was 'Nil' the assessee was not

entitled to claim deduction under Chapter VI-A which

includes Section 80-I (of Income Tax Act, 1961) also.

15. The conclusion was thus to the effect that where the

assessee deserves profits from multiple units, all being

eligible for deduction under Chapter VIA, the profits or losses

arising from the respective units have to be considered in

totality and only if the resultant figure were positive, would

the assessee be entitled to its claim. Thus, the judgment

considers the interplay between the income and losses arising

from eligible units alone, all of which are eligible for

deduction under Chapter VIA, and would not apply to the facts

and circumstances of the present case whether the claim under

Section 80I (of Income Tax Act, 1961) was restricted only to the 16 MW unit at Karnataka.

Mr.Senthil Kumar, fairly, does not dispute this position.

16. In the light of the above discussion, the questions of

law are answered in favour of the Assessee and against the

Revenue and the Tax Case (Appeal) is dismissed. No costs.

Sd/-

Assistant Registrar(CS IV)

Sub Assistant Registrar