Industrial expansion subsidies constitute capital receipts and must be excluded from computation of MAT book profits.

The appellant/assessee, a manufacturer of graphite electrodes and calcined petroleum coke, operated three captive power units

For the Assessment Year 2002-03, the assessee claimed deductions under Section 80-IA for power profits (computed using State Electricity Board rates) and Section 80HHC for export profits

The assessee further treated a sales tax remission subsidy (received under the West Bengal Incentive Scheme, 1993) as a capital receipt and excluded it from "Book Profits" under Section 115JB (MAT)

The Assessing Officer ("AO") disallowed these treatments, specifically: (i) excluding electricity duty from the power transfer price; (ii) reducing 80HHC profits by the 80-IA deduction amount; and (iii) treating the subsidy as revenue income

The Income Tax Appellate Tribunal ("ITAT") largely upheld the AO’s adjustments

1. Whether the transfer price of power for Section 80-IA deduction must be computed by excluding the electricity duty component included in the State Electricity Board (SEB) tariff

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

3. Whether a sales tax remission subsidy granted for unit expansion in backward areas is capital or revenue in nature

4. Whether a capital subsidy can be excluded from "Book Profits" computed under Section 115JB

The "market value" for Section 80-IA(8) is the composite tariff (including statutory levies) charged by SEBs to industrial consumers

Section 80-IA(9) only prevents double deduction on the same profits and does not apply to independent sources of income

The "Purpose Test" from CIT v. Ponni Sugars and Chemicals Ltd. and CIT v. Shree Balaji Alloys, which mandates that subsidies for industrial expansion are capital receipts

Capital receipts do not constitute income and must be excluded from MAT book profits under Section 115JB

Regarding the transfer price of power, the Court reasoned that the SEB tariff is a composite market price; thus, artificially excluding the electricity duty component would violate the statutory requirement to adopt the price the electricity would "ordinarily fetch in the open market"

On the second issue, the Court found that the power and export divisions were separate units with independent accounts; since the power profits were not part of export profits, there was no overlap or "double deduction" to trigger the restrictive proviso of Section 80-IA(9)

Regarding the subsidy, the Court analyzed the West Bengal Incentive Scheme, 1993, and concluded its primary objective was to induce capital investment and capacity expansion, rather than assisting in day-to-day trade, thus satisfying the "Purpose Test" for capital receipts

Consequently, the Court determined that as the subsidy was a capital receipt, it did not possess the character of "income" and must be excluded from Section 115JB book profits, even if it was credited to the profit and loss account

It held that: (i) electricity duty must be included in the market value for Section 80-IA; (ii) 80-IA deductions should not reduce 80HHC profits where sources are independent; (iii) the sales tax remission was a capital receipt; and (iv) such capital receipts must be excluded from MAT book profits. The appeal was allowed.