BHARAT PETROLEUM CORPORATION LTD.,MUMBAI vs. PR. CIT, CIRCLR-2,, MUMBAI

PER VIKAS AWASTHY, JM: These two appeals by the assessee are directed against the orders of Principal Commissioner of Income Tax -2, Mumbai [in short ‘the PCIT’) passed under section 236 of Income Tax Act, 1961 (in short 'the Act') for assessment year 2015-16 dated 19/02/2020 and for assessment year 2017-18 dated 24/02/2020, respectively. Since,

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the facts germane to both these appeals are identical, these appeals are taken up together for adjudication and are decided vide this common order.

ITA No.1602/Mum/2020 - A.Y. 2015-16:

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Thereafter, the assessee filed revised return of income on 30/03/2017. The assessee in its revised return of income claimed deduction of Rs.7,30,21,49,440/- under section 32AC of the Act. The deduction claimed under section. 32AC of the Act was examined by the Assessing Officer in the course of scrutiny assessment proceedings and after being satisfied with the claim of assessee allowed the same vide assessment order dated 29/12/2017. Thereafter, the PCIT exercising revisional powers under section 263 of the Act issued show cause notice dated 28/01/2020 in respect of three issues namely:

(i) Investment allowance claimed u/s.32AC of the Act; (ii) Exemption claimed u/s. 10(34) of the Act on dividend income of Rs.114.68 crores received from KRL Trust; and (iii) Claim of depreciation. The ld. Counsel for the assessee stated at the outset that the third issue i.e. provision of claim of depreciation does not survive as the Assessing Officer while passing order giving effect to the order of PCIT passed under section 263 of the Act accepted assessee’s submissions and made no addition in respect of claim of depreciation.

4.1. In respect of issue No.1 relating to claim of investment allowance under section 32AC of the Act, the ld. Counsel for the assessee submitted that PCIT has erred in coming to the conclusion that LPG Cylinders and regulators are not plant and machinery and are not used in production or manufacturing process. Hence, the ‘new asset’ i.e. LPG Cylinders and regulators acquired by the assessee during the relevant period do not qualify for deduction u/s. 32AC of the Act. The ld. Counsel for the assessee submitted that the assessee had purchased LPG cylinders and regulators aggregating to Rs.897,88,04,574/- during the relevant period and claimed the benefit of investment allowance of Rs.7,30,21,49,440/- under section 32AC of the Act on the new asset acquired. During scrutiny assessment proceedings, the

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Assessing Officer made specific queries with regard to the claim made by assessee under section 32AC of the Act. The assessee vide reply dated 26/12/2017 gave details of the amount considered while computing the taxable income. In para- 12 of the said reply the assessee had specifically mentioned regarding the claim of investment allowance under section 32AC of the Act and the details of the assets acquired and installed during the financial year 2014-15 relevant to assessment year 2015-16. The reply of the assessee dated 26/12/2017 is at pages 101 to 104 of the Legal Paper Book. The details of the new assets acquired during the relevant period are at pages 66 to 73 of the Paper Book. The Assessing Officer after examining the details allowed assessee’s claim under section 32AC of the Act. The ld. Counsel for the assessee defending the assessment order made two fold submissions: (i) The asset acquired i.e. LPG cylinders fall within the definition of ‘new asset’ as defined under section 32AC(4) of the Act and hence, eligible for deduction as investment allowance; and (ii) The Assessing Officer after having examined the issue has taken one of the possible views, therefore, the twin conditions laid down under section 263 of the Act i.e. the assessment order is erroneous and prejudicial to the interest of Revenue are not satisfied. The ld. Counsel for the assessee submitted that merely for the reason that the Assessing Officer has not expressed his opinion on the issue in the assessment order would not mean that the Assessing Officer has not examined the issue. If the Assessing Officer has not given detailed findings on the issue in the assessment order, it would not make the assessment order erroneous. To buttress his argument, the ld. Counsel for the assessee placed reliance on the following decisions: (i) CIT vs. Reliance Communication Ltd., 244 Taxman 55(SC) (ii) CIT vs. Reliance Communication Ltd., 396 ITR 217(Bom) (iii) CIT vs. Gabriel India Ltd., 203 ITR 108(Bom)

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Therefore, the impugned order is liable to be quashed on this ground alone.

4.2. The ld. Counsel for the assessee further submitted that the Assessing Officer after examining assessee’s claim of investment allowance accepted the same in scrutiny assessment proceedings. The view taken by the Assessing Officer is one of the possible view. Merely for the reason that the PCIT is of different view or does not subscribe to the view taken by the Assessing Officer would not make the assessment order erroneous. In support of his contentions the ld. Counsel for the assessee placed reliance on the following decisions. (i) Malabar Industrial Co. Ltd. vs. ACIT, 243 ITR 83(SC) (ii) CIT vs. Neerav Modi, 244 Taxman 194 (SC) (iii) CIT vs. Max India Ltd., 295 ITR 282(SC) The ld. Counsel for the assessee pointed that the Assessing Officer while giving effect to the order of the PCIT under section 263 of the Act has rejected the assessee’s claim of investment allowance under section 32AC of the Act.

4.3. Further, the ld. Counsel for the assessee submitted that the PCIT has erred in holding that the ‘new asset’ must be installed and used for manufacturing process. The LPG Cylinders are used for marketing of LPG and are not plant and machinery installed for the purpose of manufacturing. The ld. Counsel for the assessee in order to substantiate that the LPG cylinders fall within the meaning of plant and machinery referred to Appendix-1 to Income Tax Rules, 1962, wherein the table of rates at which depreciation is admissible on various categories of assets is given. The ld. Counsel for the assessee pointed that in Part-A of the said Appendix, Category-III is Machinery and Plant. Gas cylinders includes valves and regulators are included in the category of Machinery and Plant in clause 8(x) of Category-III. As per said table, the rate of depreciation on gas cylinders include valve and regulators is 40%. The ld.

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Counsel for the assessee asserted that the expression gas cylinders mention in the said table is used in generic sense. The gas cylinders include LPG cylinders as well. The statute itself classifies gas cylinders as Machinery and Plant. When the gas cylinders are used for refilling, they are deemed to be installed or put to use. 4.4. The ld. Counsel for the assessee, referred to the decision of Hon'ble Supreme Court of India in the case of CIT vs. Hindustan Petroleum Corporation Ltd. reported as 396 ITR 696 (SC) to assert that the process of bottling gas into cylinders by complex technical process undertaken in plant and machinery amounts to production/manufacturing. The ld. Counsel for the assessee submitted that the PCIT has taken a very narrow view of the expression ‘manufacturing or production’ and ‘new asset’ used in sub-section(1) of section 32AC of the Act.

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on the beneficiary or on the Trust on behalf of the Beneficiary. Consistently, the department has accepted this position since AY 2007-08 and no addition was made. There has been no change in the facts in the impugned assessment year.

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(i) Assessee’s claim of exemption u/s. 32AC of the Act in respect of new Plant & Machinery; and (ii) Exemption claimed u/s. 10(34) of the Act on dividend income received from KRL Trust. 8. The first contention of the assessee is that the Assessing Officer has examined the issue of assessee’s claim of investment allowance u/s. 32AC of the Act during the course of scrutiny assessment. A perusal of the assessment order dated 29/12/2017 passed u/s. 143(3) of the Act reveal that there is no discussion/observation by the Assessing Officer in the order on assessee’s claim of investment allowance u/s. 32AC of the Act. Disregarding Assessing Officer’s failure to comment on the issue in assessment order, the fact whether the issue has been examined during scrutiny assessment can be inferred from the proceedings that have taken place during the course of scrutiny assessment. The ld. Counsel for the assessee has drawn our attention to the reply by assessee dated 26/12/2017 at page 101 of the Legal Paper Book. The ld. Counsel for the assessee has argued that the assessee has furnished details of addition to fixed assets along with supporting documents as Annexure-4 to said letter and has also specifically mentioned about claim of investment allowance u/s. 32AC of the Act in Annexure-1 to said reply. The Assessing Officer after being satisfied with the submissions made by Assessing Officer has made no addition in the assessment order. Undisputedly, the assessee has furnished the details of addition to fixed assets costing more than Rs.1.00 crore before the Assessing Officer. A perusal of the aforesaid list annexed as Annexure-4 to the reply reveal that apart from other assets the list also mentions LPG pressure regulators and LPG cylinders. However, it is not emanating from the notice u/s. 142(1) of the Act dated 16/11/2017 (at page 44 of the paper book) that any query was made the Assessing Officer with regard to purchase of new assets having reference to the provisions of section 32AC of the Act. No material is available on record to show that the Assessing Officer during

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assessment proceedings made inquiries qua assessee’s claim of deduction u/s. 32AC of the Act. Thus, the Assessing Officer failed to examine assessee’s claim of investment allowance u/s. 32AC of the Act.

The other issue racked up by the PCIT in exercise of revisional powers is divided income received from KRL Trust claimed as exempt income u/s. 10(34) of the Act by assessee. We find that neither in the assessment order nor in questionnaire issued to the assessee during assessment proceedings this issue was touched upon by the Assessing Officer. Thus, we are of the considered view that the PCIT has rightly exercised revisional jurisdiction to examine assessee’s claim u/s. 32AC of the Act and u/s 10(34) of the Act. The ground No.1 & 2 of the appeal are dismissed, accordingly.

“(1) Where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new asset after the 31st day of March, 2013 but before the 1st day of April, 2015 and the aggregate amount of actual cost of such new assets exceeds one hundred crore rupees, then, there shall be allowed a deduction,— (a) ……………… (b) ……………..”

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A bare perusal of sub-section (1) to section 32AC would show that the assessee would be eligible for claiming investment allowance subject to conditions that the assessee: (i) is a company; (ii) engaged in business of manufacture or production; and (iii) acquires and installs new asset. The first condition that assessee is a company is not in dispute. Now we will examine whether the LPG cylinders and regulators fall within the meaning of ‘new asset’ in the context of section 32AC. The ‘new asset’ has been defined in sub-section (4) to section 32AC. The definition of ‘new asset’ is reproduced herein below:

“4) For the purposes of this section, “new asset” means any new plant or machinery (other than ship or aircraft) but does not include—

(i) any plant or machinery which before its installation by the assessee was used either within or outside India by any other person;

(ii) any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;

(iii) any office appliances including computers or computer software;

(iv) any vehicle; or

(v) any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.”

As per the definition, new asset means any new plant or machinery. Thereafter, there are certain exclusions in the definition. The new asset which is subject matter of dispute before us is LPG cylinders and regulators. The aforesaid asset certainly does not fall in the exclusions mentioned in the definition of new asset. Now, the question is whether the LPG cylinders and regulators can be construed as plant or machinery? The ld. Counsel for the assessee has drawn our attention to the New Appendix No. I of the Income Tax Rules, 1962. Appendix -I is a Table of rates at

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which depreciation is admissible. Part -A of the aforesaid table gives the list of tangible assets. Machinery and Plant is listed as Category -III of Tangible Assets. Gas cylinders including valves and regulators are listed in Clause 8(x) in Category-III i.e. Machinery and Plant. As per said table gas cylinders including valves and regulators are admissible for depreciation @40%. The inclusion of cylinders and regulators in the list of tangible assets eligible for depreciation in Appendix I shows beyond doubt that the Revenue for all intents and purposes consider cylinders and regulators as Machinery and Plant. Thus, Revenue cannot take a stand contrary to the provisions of Income Tax Rules. In the table cylinders and regulators are not specified and the expression has been used in generic sense. Therefore, cylinders and regulators as listed in the table would also include LPG Cylinders and regulators. Therefore, it can be safely construed that LPG Cylinders fall within the ambit of Machinery and Plant. The logical corollary would be, the LPG Cylinders and regulators acquired by assessee during the period relevant to the Assessment Year under appeal are ‘new asset’.

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loader machine fell under clause III (D)(8) of Appendix - I of the Income-tax Rules, 1962, and was, therefore, entitled to depreciation at the rate of 30 per cent. The view of the Tribunal was upheld by the Hon’ble High Court of Madhya Pradesh reported as 220 ITR 408.

11.1 In the case of CIT vs. Saraspur Mills Ltd., 36 ITR 580 (Bom), the Hon'ble Jurisdictional High Court explained the meaning of word “installed” as occurring in section 10(2)(vib) of 1922 Act. The Hon’ble Court held:

“The expression ‘installed’ is also used in the sense of ‘inducted or introduced’ and if that be the sense in which that expression is used, there is nothing inconsistent in the context in which that word is used which will justify us in holding that the word ‘plant’ in section 10, sub-section(2) clause(vib) of the Income Tax Act was not intended to include vehicle” Thus, the Hon’ble High Court rejected the argument of the Revenue that the expression ‘plant’ used in Section 10(2)(vib) of 1922 Act postulates fixed in a position and does not include vehicles.

11.2 Thus, from above decisions and dictionary meaning of the word ‘install’, it can be safely construed that the expression install/installed is not limited to fixing permanently for the purpose of manufacture or production, the expression means and includes ready to use and moveable assets. In the present context the LPG Cylinders and regulators are installed when they are used for refilling. We are of considered view that the PCIT has erred in interpreting the meaning of word ‘install/installed’ in a narrow/limited context.

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Act. The assessee therein was engaged in the process of bottling LPG cylinders meant for domestic use. The Assessing Officer disallowed the claim of assessee holding that the assessee is not engaged in the process of production or manufacturing activity. According to the Assessing Officer LPG is produced and manufactured in Refinery and thereafter there is no change in the chemical composition or other properties of the gas in the activity of filling the cylinder. In first appeal, the CIT(A) affirmed the findings of Assessing Officer. On further appeal by the assessee, the Tribunal held that bottling of LPG cylinders is a complex activity which involve multiple process viz. LPG suction, vapor distribution, compression of LPG vapor, external and internal cleaning, hydro pressure testing, refilling, quality control, etc. The Tribunal held that the activity of bottling LPG cylinder would amount to manufacturing activity, hence, the assessee is eligible for deduction u/s. 80 HH, 80I and 80 IA of the Act. The Revenue carried the issue before the Hon’ble High Court but remained unsuccessful. Thereafter, the Revenue filed appeal before the Hon'ble Supreme Court of India. The Hon’ble Apex Court after considering the submissions of rival sides and provisions of the section under which deduction was claimed, affirmed the view of Tribunal and the High Court. The relevant extract of the aforesaid judgment is reproduced herein below:

“15) At the outset, it needs to be emphasised that the aforesaid provisions of the Act use both the expressions, namely, ‘manufacture’ as well as ‘production’. It also becomes clear after reading these provisions that an assessee whose process amounts to either ‘manufacture’ or ‘production’ (i.e. one of these two and not both) would become entitled to the benefits enshrined therein. It is held by this Court in Arihant Tiles and Marbles P. Ltd. case that the word ‘production’ is wider than the word ‘manufacture’. The two expressions, thus, have different connotation. Significantly, Arihant Tiles judgment decides that cutting of marble blocks into marble slabs does not amount to manufacture. At the same time, it clarifies that it would be relevant for the purpose of the Central Excise Act. When it comes to interpreting Section 80-IA of the Act (which was involved in the said case), the Court was categorical in pointing out that the aforesaid interpretation of ‘manufacture’ in the context of Central Excise Act would not apply while interpreting Section 80-IA of the Act as this provision not only covers those assessees which are involved in the

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process of manufacture but also those who are undertaking ‘production’ of the goods. Taking note of the judgment in Commissioner of Income Tax, Goa v. Sesa Goa Ltd. (2004) 271 ITR 331 (SC) which was rendered in the context of Section 32A of the Act and which provision also applies in respect of ‘production’, the Court reiterated the ratio in Sesa Goa Ltd. to hold that the word ‘production’ was wider than the word ‘manufacture’. On that basis, finding arrived at by the Court was that though cutting of marble blocks into marble slabs did not amount to ‘manufacture’, if there are various stages through which marble blocks are subjected to before they become polished slabs and tiles, such activity would certainly be treated as ‘production’ for the purpose of Section 80-IA of the Act. In this context, relevant discussion contained in Arihant Tiles case needs to be reproduced, which is as under: “16. In the present case, we have extracted in detail the process undertaken by each of the respondents before us. In the present case, we are not concerned only with cutting of marble blocks into slabs. In the present case we are also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from the process indicated hereinabove is that there are various stages through which the blocks have to go through before they become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand, there is certainly an activity which will come in the category of “manufacture” or “production” under Section 80-IA of the Income Tax Act. 17. As stated hereinabove, the judgment of this Court in Aman Marble Industries (P) Ltd. [(2005) 1 SCC 279 : (2003) 157 ELT 393 ] was not required to construe the word “production” in addition to the word “manufacture”. One has to examine the scheme of the Act also while deciding the question as to whether the activity constitutes manufacture or production. Therefore, looking to the nature of the activity stepwise, we are of the view that the subject activity certainly constitutes “manufacture or production” in terms of Section 80-IA. 18. In this connection, our view is also fortified by the following judgments of this Court which have been fairly pointed out to us by learned counsel appearing for the Department. 19. In CIT v. Sesa Goa Ltd. [(2004) 13 SCC 548 : (2004) 271 ITR 331 ], the meaning of the word “production” came up for consideration. The question which came before this Court was whether ITAT was justified in holding that the assessee was entitled to deduction under Section 32-A of the Income Tax Act, 1961, in respect of machinery used in mining activity ignoring the fact that the assessee was engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing. 20. The High Court in Sesa Goa case [(2004) 13 SCC 548 : (2004) 271 ITR 331 ], while dismissing the appeal preferred by the Revenue, held that extraction and processing of iron ore did not amount to “manufacture”. However, it came to the conclusion that extraction of iron ore and the various processes would involve “production” within the meaning of Section 32-A(2)(b)(iii) of the Income Tax Act, 1961 and consequently, the assessee was entitled to the benefit of investment allowance under

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Section 32-A of the Income Tax Act. In that matter, it was argued on behalf of the Revenue that extraction and processing of iron ore did not produce any new product whereas it was argued on behalf of the assessee that it did produce a distinct new product. 21. The view expressed by the High Court that the activity in question constituted “production” has been affirmed by this Court in Sesa Goa case [(2004) 13 SCC 548 : (2004) 271 ITR 331 ] saying that the High Courts opinion was unimpeachable. It was held by this Court that the word “production” is wider in ambit and it has a wider connotation than the word “manufacture”. It was held that while every manufacture can constitute production, every production did not amount to manufacture. 22. In our view, applying the tests laid down by this Court in Sesa Goa case [(2004) 13 SCC 548 : (2004) 271 ITR 331 ] and applying it to the activities undertaken by the respondents herein, reproduced hereinabove, it is clear that the said activities would come within the meaning of the word “production”.” 16) Keeping the aforesaid distinction in mind, let us take note of the process of LPG bottling that is undertaken by the assessees herein and about which there is no dispute. It has come on record that specific activities at assessees’ plant include receiving bulk LPG vapour from the oil refinery, unloading the LPG vapour, compression of the LPG vapour, loading of the LPG in liquefied form into bullets, followed by cylinder filling operations. The stages of these activities are as under: (a) Bulk LPG is received in the bottling plant through road tankers/rail wagons; (b) The LPG is unloaded into spheres/bullets through LPG compressors which use variable levels of pressure for suction, unloading and vapour recovery; (c) Refilling/bottling of LPG in cylinders by compressing the same into liquid form; and (d) Capping, fixing of seals and safety valves prior to storage and loading of filled cylinders.

17) Thus, after the bottling activities at the assessee’s plants, LPG is stored in cylinders in liquefied form under pressure. When the cylinder valve is opened and the gas is withdrawn from the cylinder, the pressure falls and the liquid boils to return to gaseous state. This is how LPG is made suitable for domestic use by customers who will not be able to use LPG in its vapour form as produced in the oil refinery. It, therefore, becomes apparent that the LPG obtained from the refinery undergoes a complex technical process in the assessee’s plants and is clearly distinguishable from the LPG bottled in cylinders and cleared from these plants for domestic use by customers. It may be relevant to point out that keeping in view the aforesaid process, the ITAT arrived at the specific findings in support of its decision, which are as under: (a) There is no dispute that the LPG produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety.

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(b) LPG bottling is a highly technical and complex activity which requires precise functions of machines operated by technically expert personnel. (c) Bottling of LPG is an essential process for rendering the product marketable and usable for the end customer. (d) The word ‘production’ has a wider connotation in comparison to ‘manufacture’, and any activity which brings a commercially new product into existence constitutes production. The process of bottling of LPG renders it capable of being marketed as a domestic kitchen fuel and, thereby, makes it a viable commercial product.

18) In the considered opinion of this Court, the aforesaid activity would definitely fall within the expression ‘production’. We agree with the submission of the learned counsels for the assessees that the definition of ‘manufacture of gas’ in Rule 2 (xxxii) of the Gas Cylinders Rules, 2004 also supports the case of the assessees inasmuch as gas distribution and bottling is treated as manufacturing or producing gas. We are also inclined to accept the submission of the learned counsel for the assesses that various High Courts have, from time to time, decided that bottling of gas into cylinder amounts to production and, therefore, claim of deduction under Sections 80HH, 80-I and 80-IA would be admissible. Another important aspect which was highlighted by learned counsels for the assessees was that identical issue whether bottling of gas into cylinder amounts to production for claim of deduction under the Act has been considered by various High Courts and decided in the affirmative but those decisions were not challenged by the Department. The cases specifically referred were M/s. Puttur Petro Products Pvt. Ltd. v. The Assistant Commissioner of Income Tax, Mangalore (2014) 361 ITR 290 )and Central U.P. Gas Ltd. v. Deputy Commissioner of Income Tax, Kanpur (Income Tax Appeal No. 224 of 2014 decided by High Court of Allahabad. 19) From the submissions made by learned counsel for the Revenue, who banked on the reasoning given by the AO, it can be gathered that the entire thrust of the AO was that the process involved in filling up the gas into cylinders does not amount to ‘manufacture’ inasmuch as the said process does not bring into existence a new identifiable and distinctive goods. In the first instance, no distinction was drawn between manufacture and production and the matter was not looked into from the angle as to whether the aforesaid process would amount to production or not. Other reason which prevailed with the AO and which was also the argument of the learned counsel for the Revenue was that, on identical facts, the Gujarat High Court had held that refilling the LPG after purchasing from M/s. HPCL into small cylinders would not amount to manufacture. That was a case which was decided in the context of the Gujarat Sales Tax Act, 1969. The Court held that transfer of LPG from bulk containers into cylinders did not amount to process of manufacture. It is pertinent to point out that Section 2(16) of the Gujarat Sales Tax Act, 1969 defines ‘manufacture’ and, therefore, the entire case was examined keeping in view the said definition of ‘manufacture’ and the issue was as to whether the process amounted to

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manufacture or not. As pointed out above, the question as to whether it amounts to ‘production’ as well did not arise for consideration. The AO committed manifest error in relying upon the said decision inasmuch as the provisions with which we are concerned in the instant case use the words ‘manufacture or production’ and are not limited to ‘manufacture’ alone.” The Hon’ble Apex Court in a lucid manner has explained the complex process of bottling LPG in cylinders. Thus, the Hon’ble Court after methodically examining the intricate procedures involved in bottling LPG cylinders came to the conclusion that process amounts to ‘manufacturing or production’.

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section 115O of the Act, hence, same amount cannot be taxed twice merely for the reason that it has travelled through a Trust of which the assessee is a beneficiary.

In the preceding Assessment Years starting from A.Y. 2007-08, the Revenue has accepted the transaction and made no addition. The principle of consistency demands where there has been no change in the facts & law, no addition should be made on the settled and accepted transaction. Thus, in view of the accepted position, we find merit in ground No.5 raised by the assessee.

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Order pronounced in the open court on Wednesday the 23rd day of February, 2022.

Sd/- Sd/- ( M. BALAGANESH ) (VIKAS AWASTHY) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER मुंबई/ Mumbai, �दनांक/Dated 23/02/2022 Vm, Sr. PS(O/S)

��त�ल�प अ�े�षतCopy of the Order forwarded to :

BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai