Calcutta High Court
M/S. Graphite India Ltd vs Commissioner Of Income Tax – Iv on 21 April, 2026
Author: Rajarshi Bharadwaj
Bench: Rajarshi Bharadwaj
2026:CHC-OS:129-DB
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION (Income Tax)
(Original Side)
Reserved on : 04.02.2026.
Pronounced on : 21.04.2026
ITA 407 OF 2008
. M/S. GRAPHITE INDIA LTD.
...Appellant
-VS-
COMMISSIONER OF INCOME TAX - IV, KOLKATA.
....Respondent
Present:-
Mr. J. P. Khaitan, Sr. Adv.
Mr. Somak Basu, Adv.
Mr. Swagato Kabiraj, Adv.
…for the appellant
Mr. Aryak Datt, Adv.
Mr. Madhu Jana, Adv.
….. for the Respondent
Coram: THE HON’BLE JUSTICE RAJARSHI BHARADWAJ,
And
THE HON’BLE JUSTICE UDAY KUMARRajarshi Bharadwaj, J:
1. The appellant/petitioner has filed this appeal under Section 260A of the
Income Tax Act, 1961 (hereinafter referred to as “the Act”), challenging the order
dated January 10, 2008 passed by the Learned Income Tax Appellate Tribunal
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(ITAT), Kolkata Bench “B”, for the assessment year AY 2002-03, on the
substantial questions of law formulated at the time of admission.
2. The facts in a nutshell are that the assessee, a company under the
Companies Act, 1956, with its registered office at 31, Chowringhee Road,
Kolkata, manufactures and sells graphite electrodes and calcined petroleum
coke, while also generating power through three units (PU-I, PU-II hydel, PU-III)
at Bangalore and Nashik, mostly for captive use by its electrode division. For AY
2002-03, it claimed Rs. 35,65,09,296 deduction u/s 80-IA on power profits,
computed via transfer pricing at KSEB/MSEB purchase rates as per section 80-
IA(8) and export profits under section 80HHC on electrode exports, without
reducing 80-IA profits, treating 80HHC as self-contained. It excluded sales tax
remission subsidy (Rs. 70,45,931) as capital receipts, 100% export profits from
MAT book profits u/s 115JBand capital profits from fixed assets/investments
sales.
3. The Assessing Officer disallowed the assessee computation of transfer
price for captively consumed power at full KSEB/MSEB purchase rates, instead
of adopting rates from third-party sales. The AO also reduced the profits eligible
for deduction under section 80HHC by the amount of section 80-IA profits as
per section 80-IA(9), treated the sales tax remission subsidy as revenue receipt,
permitted exclusion of only 70% of export profits from book profits under section
115JB citing sub-section (1B) of section 80HHC and included capital profits
from sale of fixed assets and investments in book profits.
4. On appeal, the CIT(A) partially allowed the transfer pricing claim by
permitting KSEB/MSEB rates minus the electricity duty component, but upheld
all other adjustments made by the AO. Being aggrieved, the assessee preferred
an appeal under section 260A, contesting Tribunal errors on market value,
double deduction, subsidy nature and book profit exclusions
5. Learned counsel appearing for the appellant raises the issue on the
following substantial questions of law that have been admitted:
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a. Whether on the facts and in the circumstances of the case and in law, the
Tribunal was right in holding that, for the purpose of quantifying the
deduction under section 80-IA of the Act, the transfer price of power had to
be computed without taking into account the electricity duty component
included in the sale price charged by KSEB and MSEB?
6. We have heard learned Counsel for the appellant/petitioner as well as for
the respondent at length. Since the issues involved are pure questions of law
and have been settled by binding precedents of the Hon’ble Supreme Court and
this Court, we proceed to decide the appeal on merits.
7. Firstly, the assessee is engaged in the manufacture and sale of graphite
electrodes and calcined petroleum coke and also in the generation of power
through its captive power undertakings at Bangalore and Nashik. The electricity
so generated is largely consumed captively by its manufacturing divisions. For
the purpose of computing deduction under Section 80-IA, the assessee adopted
the transfer price as the rate at which electricity was purchased from the
Karnataka State Electricity Board (KSEB) and the Maharashtra State Electricity
Board (MSEB), in terms of Section 80-IA(8), treating the same as the “market
value”.
8. The Assessing Officer, though accepting the SEB tariff as the basis,
excluded the electricity duty component embedded in such tariff on the ground
that no such duty was payable in respect of captive consumption. This view has
been affirmed by the Tribunal.
9. The controversy is no longer res integra. The Supreme Court in CIT v.
Jindal Steel and Power Ltd. (460 ITR 162) has held that for the purposes of
Section 80-IA, the market value of electricity supplied by a captive unit must be
determined with reference to the rate at which the State Electricity Board
supplies electricity to industrial consumers in an open market. The Court
clarified that such consumer tariff constitutes the appropriate benchmark and
not any notional or truncated rate.
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10. A similar view was taken by the Calcutta High Court in CIT v. ITC Ltd.
(236 Taxman 612), subsequently affirmed by the Supreme Court, wherein it
was held that the SEB tariff payable by industrial consumers represents the
open market value contemplated under Section 80-IA(8).
“The market value… should be computed by considering the rate at which the
State Electricity Board supplied power to the consumers in the open market…” and
“the rate at which the State Electricity Board supplied power to the industrial
consumers has to be taken as the market value for computing deduction under
11. The tariff payable to SEBs is a composite price and includes statutory
levies such as electricity duty. Once the statute requires adoption of the price
that electricity would ordinarily fetch in the open market, it is impermissible to
artificially exclude components forming an integral part of such price.
12. The Tribunal, therefore, erred in directing exclusion of the electricity duty
component while computing the transfer price. We accordingly answer
substantial question (a) in the negative, i.e., in favour of the assessee and
against the revenue.
b. Whether on the facts and in the circumstances of the case and in law, the
Tribunal was right in holding that deduction allowed u/s 80IA of the Act
needs to be reduced while computing Profits of the Business eligible for
deduction u/s 80HHC of the Act?
13. Secondly, the assessee carries on distinct activities such as generation of
power through independent undertakings eligible for deduction under Section
80-IA and manufacture and export of graphite electrodes, eligible for deduction
under Section 80HHC. It is not in dispute that the power undertakings are
separate units maintaining independent accounts and are not engaged in export
activity. Likewise, the export division has not claimed any deduction under
Section 80-IA. The Assessing Officer reduced the business profits eligible under
Section 80HHC by invoking Section 80-IA(9). The Tribunal affirmed such
reduction relying on earlier orders. The interpretation adopted by the Tribunal
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cannot be sustained in view of subsequent judicial pronouncements. The
deduction granted under Section 80-IA cannot be reduced while computing
profits eligible for deduction under Section 80HHC where the deductions arise
from independent businesses. The Supreme Court in Shital Fibers Ltd. v. CIT
(376 ITR 309) has explained that Section 80-IA(9) is intended only to prevent
double deduction in respect of the same profits and does not authorize
reduction where the deductions relate to different sources of income. Similarly,
the Gujarat High Court in CIT v. Shah Alloys Ltd. (335 ITR 210) held that
profits of an eligible power undertaking cannot be reduced while computing
deduction under Section 80HHC when there is no overlap of income. In the
present case, the profits derived from generation of power are not export profits
at all and are not eligible for deduction under Section 80HHC. Hence, there arise
no question of double deduction. We accordingly, answer substantial question
(b) in the negative, i.e., in favour of the assessee and against the revenue.
c. Whether on the facts and in the circumstances of the case, the Tribunal
was justified in law in holding that incentive/subsidy received by the
appellant in the form of remission of sales tax is not capital but revenue
in nature although the said subsidy is granted for expansion of the unit
located in backward area and is directly related to investment of fixed
capital and hence is not chargeable to tax under the provisions of Income
Tax Act, 1961?
14. Thirdly, the assessee received sales-tax remission under the West Bengal
Incentive Scheme, 1993, which was granted to encourage expansion and
modernization of industrial units located in backward areas and was directly
linked to investment in fixed capital.
15. The nature of such subsidy must be determined by applying the well-
settled “purpose test”. In CIT v. Ponni Sugars and Chemicals Ltd. (306 ITR
392), the Supreme Court held that where the object of the subsidy is to enable
setting up or expansion of an industrial unit, the receipt is capital in nature
irrespective of the mechanism through which it is granted. The principle was
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reiterated in CIT v. Shree Balaji Alloys (333 ITR 335), where incentives aimed
at promoting industrialization in backward regions were held to be capital
receipts. This Court in PCIT v. Ankit Metal & Power Ltd. (416 ITR 591)
applied the aforesaid test and held that subsidies linked to capital investment
for industrial development cannot be treated as revenue receipts.
16. A perusal of the West Bengal Incentive Scheme, 1993 clearly
demonstrates that the remission was intended to induce fresh capital
investment and expansion of industrial capacity. It was not a subsidy to assist
the assessee in carrying on its trade more profitably.
17. The Tribunal, therefore, erred in treating the said subsidy as revenue in
nature. We accordingly answer substantial question (c) in the negative, i.e., in
favour of the assessee and against the revenue.
d. Whether on the facts and in the circumstances of the case, the Tribunal
was justified in law in holding that sales tax incentive received by the
appellant cannot be excluded in computing Book Profits computed u/s
115JB of the Act?
18. Lastly, once the subsidy is held to be capital in nature, the further
question is whether it forms part of book profit under Section 115JB.
19. The Supreme Court in Apollo Tyres Ltd. v. CIT (255 ITR 273) held that
while computing book profit under the MAT provisions, the Assessing Officer
cannot make adjustments other than those specifically provided in the statute.
Following the purpose test, the Court in Ankit Metal & Power Ltd. (supra)
held that capital subsidies intended for industrial development do not partake
the character of income and must be excluded from computation of book profit
under Section 115JB.The character of the receipt does not change merely
because it is routed through the profit and loss account. As held in Sahney
Steel & Press Works Ltd. v. CIT (228 ITR 253) and reaffirmed in Ponni
Sugars (supra), the object of the subsidy determines its nature.
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20. Accordingly, the sales-tax remission, being capital in nature, could not
have been included in the computation of book profit. We accordingly answer
substantial question (d) in the negative, i.e., in favour of the assessee and
against the revenue.
21. For the foregoing reasons, the appeal under Section 260A is allowed in
favour of the assessee across all substantial questions of law.
22. Urgent certified copy, if applied for, be supplied upon compliance with
requisite formalities.
(RAJARSHI BHARADWAJ, J )
(UDAY KUMAR , J)
Kolkata
21.04.2026
PA(BS)