Capital subsidies for industrial expansion are excludible from Book Profits under Section 115JB.

The appellant, a company manufacturing graphite electrodes and operating captive power units, challenged an order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2001-02

The assessee had claimed a deduction under Section 80-IA for captive power consumption valued at Karnataka State Electricity Board (KSEB) rates and a deduction under Section 80HHC for export profits, while excluding 100% of such export profits from book profits under Section 115JB

The Assessing Officer (AO) rejected the KSEB pricing (excluding electricity duty), reduced Section 80HHC profits by the Section 80-IA deduction, allowed only an 80% exclusion of export profits from book profits, and treated sales tax remission as revenue income

The CIT(A) and ITAT largely upheld these findings, leading to the present appeal

1. Whether the transfer price of power for Section 80-IA purposes should include the electricity duty component charged by the State Electricity Board to industrial consumers.

2. Whether deductions allowed under Section 80-IA must be reduced from the business profits eligible for deduction under Section 80HHC.

3. Whether, for computing book profits under Section 115JB, 100% of export profits computed under Section 80HHC(3) should be excluded instead of the phased-down percentage (80%).

4. Whether sales tax remission granted for industrial expansion in backward areas constitutes a capital receipt or revenue income.

5. Whether such sales tax incentives can be excluded from the computation of book profits under Section 115JB.

The court applied Section 80-IA, Section 80HHC, and Section 115JB of the Income Tax Act, 1961.

It relied on the Supreme Court’s ruling in CIT v. Jindal Steel and Power Ltd. [460 ITR 162 (SC)], which established that the "market value" of power for Section 80-IA is the rate charged by the State Electricity Board (SEB) to consumers, including statutory components like duty

Regarding the interaction between Section 80-IA and 80HHC, it followed Shital Fibers Ltd. v. CIT [(2020) 476 ITR 309 (SC)]

For Section 115JB, it applied Ajanta Pharma Ltd. v. CIT [194 Taxman 358 (SC)], holding Section 115JB to be a self-contained code where the 80HHC(1B) phase-out does not apply

Finally, it applied the "purpose test" from CIT v. Ponni Sugars [(2008) 174 Taxman 87] and PCIT v. Ankit Metal & Power Ltd. [109 taxmann.com 93 (Cal)] to determine the capital nature of subsidies

Regarding the transfer price of power, the Court reasoned that market value represents the price an industrial consumer would pay the SEB, which necessarily includes electricity duty; therefore, the ITAT erred in deducting the duty component

On the second issue, the Court held that Section 80-IA deductions do not reduce the eligibility of business profits for Section 80HHC, as settled by binding precedent

For book profit computation under Section 115JB, the Court observed that Explanation (iv) refers to "profits eligible for deduction," which implies the full amount determined under Section 80HHC(3)/(3A) regardless of the restricted deduction actually allowed in the tax computation

Addressing the sales tax remission, the Court applied the "purpose test," noting the incentive was linked to fixed capital investment for units in backward areas, thereby qualifying it as a capital receipt

Consequently, since such receipts do not constitute "income" under Section 2(24), they must be excluded from book profits under Section 115JB

It held that: (i) electricity duty is part of the transfer price for Section 80-IA; (ii) Section 80-IA deductions do not reduce Section 80HHC eligible profits; (iii) 100% of export profits are excludable from book profits under Section 115JB; and (iv) sales tax incentives for backward area expansion are capital receipts excludable from both regular income and book profits