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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
O R D E R
PER PRAMOD M. JAGTAP, VICE-PRESIDENT This appeal is preferred by the Revenue against the order of learned Commissioner of Income-tax (Appeals)-2, Ahmedabad (“CIT(A)” in short) dated 29.11.2019 and the solitary issue involved therein relating to restriction of the assessee’s claim for deduction under Section 80IA in respect of profit derived from the eligible power plant by apportionment of more expenses is raised therein by the Revenue by way of following grounds:- 1. The Ld. CIT(A) has erred in law and on facts in deleting the addition on account of apportionment of expenditure between Power Plant and Sponge and Iron unit amounting to Rs.2,09,87,011/- without appreciating the fact that the assessee had apportioned all its routine expenses like Lab & testing, production expenses, purchase of store and spares, repairing and maintenance, insurance expenses, legal fees, office miscellaneous expenses, Post and Telephone, printing and stationery, salary and wages, vehicle expenses, which should have been shared between both the units, in the hands of non 80IA units. ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 2
2. The Id. CIT(A) has erred in law and on facts in deleting the addition on account of apportionment of expenditure between power plant and sponge and Iron unit even though geographically both the units were located in the same campus and hence all the related expenses were likely to be incurred evenly by both the units.
3. The Ld. CIT(A) has erred in law and on facts in deleting the addition on account of apportionment of expenditure between the power plant and sponge iron unit even though the Assessing Officer has specifically recorded in para 3.4 that the assessee has shown NIL expenses in the P& L account of power plant unit. 4. The Ld.CIT(A) has erred in law and on facts in deleting the addition on account of apportionment of expenditure between Power Plant and Sponge and Iron unit by referring to the similar disallowance having been deleted in the preceding years from A.Y.2007-08 to A.Y.2015-16 without appreciation the following facts : i) In the A.Y.2009-10 there was a finding of fact recorded in the order that the power plant was newly purchased and was under warranty period where as in the order for the current A.Y. i.e. A.Y.2017-18 there is no such fact. ii) In the A.Y.2009-10 the profits shown by the power plant unit was 15.08% as against the profit of 2.1% shown by the steel plant where as in the year under consideration the profit shown by the assessee in the power plant division is as high as 67.16% as against the net profit of 2.77% in the steel business. iii) In the A.Y.2009-10 there was a finding of fact recorded in the order that there was no maintenance cost during this year because it was under Warranty. However, during the year under consideration there is no finding of fact that the entire plant was under warranty and the assessee must have incurred repair and maintenance cost. 5. The Ld. CIT(A) has erred in law and on facts in deleting the addition of apportionment of expenditure between the power plant and sponge iron unit on the basis of similar disallowance made in the earlier years without appreciating the facts that each year is separate year and the apportionment of expenditure depends upon the facts of each year. 2. The assessee, in the present case, is a company which is engaged in the business of manufacturing and reseller of Angle Channels Ingots. The return of income for the year under consideration was filed by it on ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 3 27.10.2017 declaring a total income of Rs.16,60,72,740/- after claiming deduction of Rs.9,88,84,902/- under Section 80IA(4) of the Income-tax Act, 1961 (“the Act” in short) in respect of profit derived from its eligible unit namely Power Plant Division. The case of the assessee was selected for scrutiny under CASS and a notice under Section 143(2) of the Act was issued to the assessee on 13.08.2018. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has shown net profit @ 67.16% in respect of turnover of Rs.14,51,69,472/- of Power Plant Division whereas the net profit of only 2.77% was shown by the assessee in respect of its Steel Business. Keeping in view this inordinately high net profit declared by the assessee in respect of Power Plant Division which was eligible for deduction under Section 80IA of the Act and having regard to the failure of the assessee to show any comparable instance of power plant operator showing such high profit, the Assessing Officer was of the view that the provision of sub-section (8) of Section 80IA was applicable in the case of the assessee and profit of both the units of the assessee was required to be re-determined as done in the earlier years. In this regard, following explanation was offered by the assessee before the Assessing Officer during the assessment proceedings: “In all prior years the additions were made on ad hoc basis, our contention is that the power plant unit is automatic plant and the expenses which are subject matter to disallowance has no nexus to the operation of the plant However company has till the A.Y. 2015- 2016 CLAIMED expenses on line with the CIT appeal orders, but as such from the A.Y. 2016-2017 the company has due to expansion of business achieved the higher turnover and due to another Solar Plant the quantum of operation etc has been increased many fold and the capacity of power plant remains the same hence looking to the nature of expenses same has not been apportioned towards the power plant, and as such looking to the nil effect to the tax liabilities, company has treated the power plant as embedded of its prime unit.” ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 4
The explanation offered by the assessee was not found satisfactory by the Assessing Officer. According to him, there was a failure of the assessee to furnish the details of distribution of common expenses under the head “other expenses” to the unit, the profit of which was entitled for deduction under Section 80IA of the Act. He held that some of the said expenses were attributable to the said unit and accordingly 10% of the total ‘other expenses’ claimed by the assessee were apportioned by the Assessing Officer to the Power Plant Division of the assessee-company which was entitled for deduction under Section 80IA of the Act as per the chart given on page Nos. 3 &4 of his order:
Manufacturing expenses head Total Expenditure Apportionment to be made 80IA Non-80IA Lab & Testing 2684025 268402.5 2415622.5 Production Expenses 109153758 10915375.8 98238382.2 Purchase of Store & Spares 34509148 3450914.8 31058233.2 Repairing & Maintenance 17761034 1776103.4 15984930.6 Administrative & Other Expenses Insurance Exp 1630442 163044.2 1467397.8 Legal Fees 1826809 182680.9 1644128.1 Office Misc. Exp 608748 60874.8 547873.2 Post & Telephone 1074579 107457.9 967121.1 Printing & Stationer 86390 8639 77751 Salary & Wages 25028062 2502806.2 22525255.8 Vehicle 15507112 1550711.2 13956400.8 TOTAL 2,09,87,011
The Assessing Officer thus reduced the profit of the Power Plant Division of the assessee-company by Rs.2,09,87,011/- being common expenses attributable to the said unit and restricted the claim of the assessee for deduction under Section 80IA(4) of the Act amounting to ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 5 Rs.9,88,84,902/- to Rs.7,78,97,891/- in the assessment completed under Section 143(3) of the Act vide order dated 18.07.2019.
Against the order passed by the Assessing Officer under Section 143(3) of the Act, an appeal was preferred by the assessee before the learned CIT(A) and after considering the submission made on behalf of the assessee as well as the material available on record, the learned CIT(A) decided the issue relating to the quantum of deduction allowable to the assessee- company under Section 80IA(4) of the Act in respect of the eligible Power Plant Division vide paragraph No. 3.3 of his impugned order as under:
3.3 I have carefully considered the assessment order and the submission of the appellant. The Assessing Officer has allocated 10% of the total other expenses to the Power Plant division on which deduction u/s 80IA(4) of the Act has been taken and reduced the claim of deduction to Rs.2,09,87,011/-. The appellant has contended that the Assessing Officer has allocated 10% of manufacturing expenses from Lab & Testing, Production expenses, Purchase of Store and spares and repairing and maintenance to the extent of Rs.1,64,10,794/-. However, the same was not related to the Power Plant Division at all as these expenses are exclusively for manufacturing expenses. The appellant submitted that in the preceding years also the similar disallowances were made by the Assessing Officer and the same has been deleted by CIT(A) and Hon. ITAT. As regards to allocation of 10% expenses of administrative and other expenses, the appellant has submitted that disallowance has been made on ad hoc basis which is arbitrary as the manufacturing activity of appellant has gone up but, the expenses on Power Plant Division has remained stationary. The appellant has submitted if at all allocation is to be made, it should be made on the basis of turnover as held by various Tribunals in number of cases. I agree with the submission made by the appellant that manufacturing expenses are related exclusively to the manufacturing units and therefore, no allocation of the same is called for in the 80IA unit. The Hon. CIT(A) in preceding years from A.Y.2007-08 to A.Y 2015-16 has also deleted the allocation made by the Assessing Officer holding the expenditure not allocatable to 80IA unit. As regards to allocation of 10% of administrative and other expenses to 80IA unit, I agree with the appellant that the same should be allocated in the proportion of turnover. The Assessing Officer is therefore directed to allocate the expenses of administrative and other expenses to 80IA unit in the ratio of turnover of ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 6 Power Plant Unit to other unit and allow the claim accordingly. The ground of appeal is partially allowed.
We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that a similar issue was involved in assessee’s own case for earlier years right from AY 2008-09 and when the same reached to the Tribunal initially for AY 2008-09, the Tribunal upheld the appellate order of the learned CIT(A) giving similar relief to the assessee on the issue under consideration for the following reasons given in paragraph Nos. 7 to 12 of its order dated 19.03.2018 passed in ITA No. 1239/Ahd/2013:-
“7. With the assistance of the ld. representatives, we have gone through the record carefully. The first adjustment made by the AO in the eligible profit is reduction of Rs.30,70,108/- on account of allocation of proportionate expenses between power plant as well as sponge iron plant. Details of expenses have been reproduced by the AO in para 3.2.4 on page no.6 of the assessment order. Major items which have been considered by the ld.CIT(A) for exemption from adjustments are as under:
“Factory General Exps. - Rs. 2456/- Purchase of Fuel - Rs. 649571/- Purchase of stores & spares - Rs. 924144/- Repairing & maintenance - Rs. 773803/- Transportation Exps. - Rs. 445355/- Total Rs.2795329/- 8. There is no dispute with regard to the proposition that if two units consisting of 80IA and non-80A are being managed and controlled under common administration and being operated in common campus then certain expenses are bound to be identified and related to these units. In case it is a difficult to find out direct attribution, then they are to be allocated on the basis of some scientific formula. The assessee is maintaining separate accounts for both plants. It has identified all direct expenses. The AO has narrated more than 32 types of expenditure under three heads viz. manufacturing expenses, administrative expenses, and financial charges. Thereafter, he made adjustments of Rs.30,70,108/-. The ld.CIT(A) has re- appreciated all these details and worked out that adjustments made on account of five types of expenditure is concerned there could not be ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 7 adjustments. Thus, we have a look on the nature of expenditure excluded by the ld.CIT(A). It is pertinent to observe that the assessee has contended before the ld.AO that power plant was newly purchased and automatic plant which requires minimum workmen. Secondly, plant was under warranty period and all the minor maintenance of on-going expenses incurred by the manufacturers. It was also pointed out that sponge iron plant undertaking has taken bank loan for installing plant in the year 2005-06 and has direct nexus with the said loan of the said sponge iron plant, whereas, there are no financial charges in power plant undertaking. It has initially raised Rs.4 crores as equity capital. Thereafter Rs.7 crores was raised from family members which is also reflected in the main books of the company. Minimum investment of Rs.10 crores to Rs.13 crores is from contribution and no finance by any bank. Thus, there was no financial charge. The ld.CIT(A) has observed that as far as fuel expenditure allocated by the AO is concerned this expenditure relates to purchase of furnace oil, R.S. mould oil, light diesel oil, etc. None of these fuel were used in the power plant, which is steam based. Thus, there should not be any allocation from fuel expenditure. Similarly, the ld.CIT(A) has examined details of maintenance expenditure i.e. repairs, stores and spares. The assessee has pointed out that its power plant was fully automatic steam based turbine, and there was no maintenance cost during these years because it was under warranty. More so, details of spare parts were submitted by the assessee showing that these were not used in power plant. In such situation, the ld.CIT(A) has excluded this expenditure. The ld.CIT(A) has also examined other factory general expenditure and transport expenditure. After taking into consideration the finding of the ld.CIT(A), we do not find any reasons to interfere in the order of the ld.CIT(A), so far as issue no.1 is concerned. The ld.CIT(A) has directed the AO not to reduce Rs.27,95,329/- out of eligible profit on account of allocation of expenditure. The order of the ld.CIT(A) on this issue is upheld.
9. Next item relates to adjustment of coal price. As observed earlier, power plant is being run on steam generated as by-product in the hands of sponge iron plant. In order to ensure smooth supply of steam, power plant needs re- heater which ensures smooth and continuous supply of steam to turbine. In this re-heater waste coal was being used by the assessee. Assessee has purchased waste coal at the rate of Rs.844/- per ton from steel unit. The ld.AO estimated that at least 5% of the total coal used by the assessee must be of first grade. Hence, he made adjustment of Rs.29,02,335/- of coal price i.e. the assessee must have incurred this much expenditure over and above shown by it. The ld.CIT(A) has deleted this adjustment on the ground that when power plant was not in existence then also alleged waste coal was being sold by the sponge iron plant. In the Asstt.Year 2007-08 when power plant ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 8 was not there, waste coal to the tune of Rs.171.82 lakhs at an average sale price of Rs.990.95 per MT was sold to the outside party. In this year, the assessee has sold waste coal to the tune of Rs.194.45 lakhs to the outside parties. Thus, it was contended that it was not debris or waste. It has useful value and that is why it has marketable value. The ld.CIT(A) has observed that the AO has not pointed out any error in the books of the assessee or any basis to observe that 5% must be taken of is grade-A quality coal for use. On due consideration of the above finding, we are of the view that there is no basis for the AO to harbor a belief that atleast 5% coal must be used by the assessee of a premium quality. It is just a guess work on the basis of surmises. The assessee has shown consumption of coal which has been purchased from steel unit and which has been purchased at market price i.e. at the rate on which steel unit has sold to the outside party. Thus, there should not be any adjustment on this count. The ld.CIT(A) has rightly excluded deduction of Rs.29,02,335/- from the eligible profit. The assessee will be entitled to deduction under section 80IA of this amount.
Third item considered by the AO relates to electricity rates. The assessee has calculated power price charge from associated unit at the rate of Rs.5.25 per unit. The AO has observed that cost from electricity board comes to Rs.5.19 per unit, and therefore, at this rate assessee should calculate its electricity charges to associate concerns. The ld.CIT(A) did not approve this view point of the AO and deleted adjustments.
Before us, the ld.counsel for the assessee placed on record a chart showing month-wise details of power tariff charged by PGVCL and tariff charged by the assessee’s power plant to the sponge power plant. He pointed out that as per agreement between the assessee and steel plant, power was supplied at a constant price at Rs.5.25 per unit, whereas PGVCL used to charge price at fluctuating basis. Its rate in April, 2007 was Rs.4.90 per unit which raised to Rs.7.49 per unit in the month of February, 2008. The average price was Rs.5.23 per unit. Similarly, in April, 2008 it has charged at the rate of Rs.5.41 per unit, whereas the assessee charged at Rs.5.75 per unit. The average price from April, 2008 to March, 2009 was Rs.5.75 per unit by PGVCL and Rs.5.75 per unit by the assessee. On the other hand, the ld.DR relied upon the order of the AO.
On due consideration of the comparative table of charges of electricity i.e. one of Electricity Board and one by assessee to the iron sponge plant, we are satisfied that the assessee has not charged the price to its associate concern at an higher rate. It is commensurate to the market rate. Considering the finding of the ld.CIT(A) on this issue, we do not see any reason to interfere in it. The AO has rightly been directed not to exclude a ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 9 sum of Rs.20,75,210/- from eligible profit for grant of deduction under section 80IA of the Act. In view of the above discussion, we do not find any merit in the appeal of the Revenue. It is dismissed.”
The decision rendered by the Co-ordinate Bench for AY 2008-09 has been subsequently followed by the Tribunal for deciding the similar issue in favour of the assessee for AY 2009-10 vide its order dated 30.05.2018 passed in & 1925/Ahd/2014.
At the time of hearing before the Tribunal, learned Counsel for the assessee has filed a statement showing that similar relief was allowed by the learned CIT(A) on the issue under consideration to the assessee even in the subsequent years from AY 2010-11 to AY 2016-17 and the Department has apparently not filed any appeal for the said years because of the low tax effect. It is thus clear that the solitary issue involved in this appeal of the Revenue is squarely covered in favour of the assessee by the decision of Co- ordinate Bench of this Tribunal rendered in assessee’s own case for AYs 2008-09 to 2009-10 and even the learned DR has not disputed this position. We, therefore, respectfully follow the said decisions of the Tribunal rendered in assessee’s own case for earlier years on the similar issue and uphold the impugned order of the learned CIT(A) giving relief to the assessee on this issue.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 15th June, 2022 at Ahmedabad. (SUCHITRA KAMBLE) VICE-PRESIDENT Ahmedabad, Dated 15 /06/2022 */Bt ACIT Vs. Mono Steel (India) Ltd AY : 2017-18 10