ACIT-1(1)(1), MUMBAI vs. M/S. HINDUSTAN PETROLEUM CORPORATION LTD,, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “E”, MUMBAI BEFORE SHRI ABY T VARKEY, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NOs. 1994 & 1995/MUM/2023 (A.Ys. 2003-04 & 2004-05) ACIT – 1(1)(1) v. Hindustan Petroleum Corporation Limited 17-Petroleum House 579-A, Aayakar Bhavan J. Tata Road, Churchgate M.K. Road, Mumbai - 400020 Mumbai - 400020 PAN: AAACH1118B (Appellant) (Respondent) CO NOs. 109 & 110/MUM/2023 [ARISING OUT OF ITA NOs. 1994 & 1995/MUM/2023 (A.Ys. 2003-04 & 2004-05)] Hindustan Petroleum Corporation Limited v. ACIT – 1(1)(1) 17-Petroleum House 579-A, Aayakar Bhavan J. Tata Road, Churchgate M.K. Road, Mumbai - 400020 Mumbai - 400020 PAN: AAACH1118B (Appellant) (Respondent) Assessee Represented by : Shri P.J. Pardiwala & Ms. Aarti Sathe Department Represented by : Shri Biswanath Das

Date of Conclusion of Hearing : 15.01.2024 Date of Pronouncement : 07.02.2024

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited O R D E R PER S. RIFAUR RAHMAN (AM)

CO NOs. 109 & 110/MUM/2023

Page No. 2

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited jurisdictional issue raised by the assessee in the cross objections. Accordingly, we keep the ground raised by the assessee in Cross objections open.

ITA No. 1994/MUM/2023 (A.Y. 2003-04) ITA No. 1995/MUM/2023 (A.Y. 2004-05)

“1. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of deduction u/s. 80IA of the Act, 1961 of Rs.9,72,33,000/-?" 2. "Whether on the facts and circumstance of the case and in law, the Ld.CIT(A) was right in deleting the disallowance of deduction u/s. 80IB of the I.T. Act, 1961 amounting to Rs.578,46,06,000/-" 3. "Whether on the facts and circumstance of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of

Page No. 3

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited construction expenses under the head sundry expenses and other charges amounting to Rs.5,10,13,674/-?" 4. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored. 5. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

Page No. 4

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited 9. On enquiry, assessee has submitted before Assessing Officer justifying the claim made by the assessee and the Assessing Officer has summarized the submissions of the assessee as under: -

“7.1 The Assessee during the course of regular assessment proceedings has given a detailed note on the operation of the captive power plant which co-generated power and steam. The Assessee submits that the captive power plant of Visakh refinery is based on co-generation of power and steam leading to more energy efficient use of fuel as compared to conventional power plants. The captive power plant includes two gas turbo generators and two heat recovery steam generators. Steam is generated in the heat recovery steam generators by using hot exhaust gases from gas turbo generators Each heat recovery steam generator has a capacity of generating 27 T/hr steam. Whenever the gas turbo generator is in operation it is ensured that the corresponding heat recovery steam generator is also put on line to avoid any energy wastage. All the steam generated from the heat recovery steam generator is utilized for refinery operations. Hence, the captive power plant is not only to generate electricity but also based on co- generation of power and steam and steam generation is unavoidable. Thus, steam generation in the captive power plant is a newly established industrial undertaking which is accepted as a separate unit by itself. 7.2 The Assessee has two options available to take income arising from steam generation by either taking the price in the open market of the product if it is saleable or actually sold in the market or consider savings in the cost of alternative uses made of steam. The different alternative uses of steam in the refinery process rule out the possibility of sale of steam in the open market. Hence, income arising from steam generation was calculated considering the savings in LSHS due to steam generated in gas turbo generators. The Assessee provided a working calculation to show that the standard LSHS requirement for production of 1 Ton of steam is 80.09 kg LSHS per MT of steam which would have been generated in the boiler using more LSHS. Since, consumption of LSHS to that extent as fuel would have increased the cost of fuel / raw material in the refinery operations and since generation of steam in the co-generation of power and steam in the captive power plant has resulted in savings they are rightly considered as income in the profit and loss account of the captive power plant at Visakh refinery.

Page No. 5

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited 7.3 The Assessee has furnished a working of receipts in respect of the plant for generation of electricity and steam (saving in LSHS) along with computation of the value considered in the profit and loss account The Assessee had also submitted a chart computing the savings in LSHS due to generation of steam in the gas turbo generators which amounted to Rs. 35,05,42,781. The same is tabulated hereunder: - Computation of savings in LSHS due to generation of steam in Gas Turbo Generators Steam Generated (A) 5,26,691 MTS LSHS required per metritonne of (B) 0.08009 Kgs steam Quantity of LSHS saved (A)*(B) 42,183 MTS Realisable Value of LSHS per MT Rs. 9913.05 Margin included in above Rs. 1602.94 Cost of LSHS Rs. 8310.11 35,05,42,781 Savings in LSHS due to Steam generation in Gas Turbo Generators 7.4 Further, the Assessee submitted that generation of electricity has not resulted in any loss and saving in LSHS by way of generation of steam has been taken into consideration during the assessment proceedings. Thus, after going through a detailed scrutiny and review of the details Assessing officer had accepted the savings in LSHS on account of generation of steam which was shown on the credit side of the profit and loss account. 7.5 The Assessee submits that the deduction has been allowed even in earlier years and attention is invited to the assessment order dated 15 December 1992 where the deduction was allowed in AY 1990-91. Further, a reference was made to the order passed under section 154 of the Act dated 6 April 1999 where in AY 1996- 97 the claim towards LPG Bottling Plant had been disallowed by the AO but the claim for deduction for captive power plant of the Mumbai refinery had been consciously allowed by the AO. Thus, the claim has been allowed on merits not only for Visakh refinery but also for Mumbai refinery that too not only through the assessment order but also by a rectification order under section 154 to the Assessee. 7.6 Hence, the Assessee submitted that the AO has allowed the deduction under section 80- IA of the Act for captive power plant unit after a detailed scrutiny r application of mind to the facts of the case. The reason for rejecting the claim of deduction based on

Page No. 6

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited no documentary evidence furnished with the objections by the Assessee has no basis and cannot be sustained. The AO while disposing off the objections has not considered the factual details before him and incorrectly held that the generation plant used only HSD and Naphtha for generation of electricity and there was no ground to show savings in terms of use of LSHS. The Assessee submits that the deduction ought to be granted to it and the same has been correctly allowed during the original assessment proceedings. The reasons for reopening the assessment on this ground are unsustainable and even on merits ought to be allowed to the Assessee. 7.7 The Assessee relies on the Bombay High Court in its own case for AY 2002-03 in Hindustan Petroleum Corporation Limited v. DM (2010) 328 ITR 534 where a deduction under section 80-IA on the generation of electricity by a captive power plant amounting to Rs. 86.37 lakhs had been allowed which was computed on the basis of savings in low sulphur heavy stock (LSHS) due to use of steam generated as a byproduct in the generation of electricity which was quantified at Rs. 29.95 crores. The AO sought to reopen the assessment to disallow the deduction under section 80-IA of the Act and the Court quashed the reopening proceedings observing that the Assessee had fully disclosed the material facts and similar claim of deduction under section 80-IA has been consistently made and allowed to the Assessee since 1990-91.”

Page No. 7

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited “8.1 As regards the issue having been already examined, this fact has been discussed in detail while disposing of the objections to reopening of the case in speaking order dated 07.02.2022 and hence does not require repetition here. Coming to the factual aspect, it is admitted fact that no actual revenue has been generated from use of the steam generated in power plant. The value of steam has been calculated on the basis of the cost of LSHS that would have been consumed had the steam generated in power plant was not available. The valuation of the steam is a pure guess work undertaken to fictitiously enhance the revenue generated from power plant. A plain reading of section 80IA make it abundantly clear that in order to avail deduction there has to be actual income. The deduction u/s 80IA is not intended for notional income. 8.2 In its submission dated 15.02.2022 and during the course of VC the assessee has reiterated the arguments made in earlier reply dated 13.01.2022. Moreover, the assessee has requested to follow the principle of judicial discipline to state that the first Appellate Authority or the Assessing Officer are bound by the orders of Tribunal. Even where the assessee or the department has pursued the matter in reference proceedings, it does not act as a kind of stay of operation of the order of the Tribunal. The principle of judicial discipline is to be followed keeping in view the rule of consistency to keep the matter alive till the issue attains finality by the High Court or Supreme Court. In case no addition/ disallowance are made in subsequent assessments on a particular issue and that issue is decided in favour of the revenue at higher forums, the department would not get second innings to play in subsequent assessments. Moreover, the existence of different facts and legal provisions in subsequent years on the same issue are other restrictions which have to be considered while following the orders of Tribunal in subsequent assessments. 8.3 The assessee has also relied upon the assessment order dated 15.12.1992 wherein the deduction was allowed in AY 1990- 91, and order u/s 154 dated 06.04.1999 for the AY 1996-97 wherein deduction u's 80IA was allowed by the AO. The orders being relied upon by the assessee pertain to Mumbai refinery which dates back to quite earlier period than the year under consideration. In the year under consideration the deduction in respect of Visakh refinery is under question. The facts of the case of the year under consideration are not identical to the facts of the years involved in the orders referred by the assessee.

Page No. 8

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited 8.4 The fact and legal position being so the claim of deduction u/s 80IA amounting to Rs. 972.33 lakhs in respect of captive power plant tis hereby disallowed and added back to the income of the assessee.”

Page No. 9

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited Hon’ble Bombay High Court and allowed the claim of the assessee merely relying on the findings of the Hon’ble Bombay High Court. He submitted that in order to appreciate the issue under consideration the issue may be remitted back the file of the Ld. CIT(A) for fresh adjudication.

Page No. 10

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited the claim of the assessee in A.Y. 2002-03. By referring to the above order he submitted that electricity generated by the assessee are nothing but utilization for captive power consumption and the by-product coming out of the electricity division which is LSHS (Steam) are also utilized within the company for captive purpose, by relying on the above decision he prayed that the issue under consideration is covered in favour of assessee.

Page No. 11

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited newly established industrial undertaking which is accepted as a separate unit by itself.

Page No. 12

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited (₹. Lakhs) (₹. Lakhs) 01. Income a) Generation 6,023.93 b) Recovered From APSEB - 6,023.93 02. Expenditure HSD / Naptha / Int.Product consumed a) 7213.97 Duties Applicable To Products b) Direct Charges 662.20 c) Indirect Charges 680.86 Sub Total 8,556.03 (Less) Saving in LSHS 3,505.43 5,051.60 Profit /Loss For 2002-03 972.33

“12. The material which has been placed on the record would support the contention of the assessee that there was a full and true disclosure of all material facts relating to the claim of the assessee for a deduction under s. 80-IA in respect of the profits made by the CPP at Vizag. In computing those profits, the assessee disclosed the two components which form a constituent element of the income of the unit. The assessee furnished a break-up of the value which it placed on the generation of electricity and on the steam which had been generated as a by-product. There was a disclosure that the basis for valuing the generation of electricity was the rate prescribed by the Andhra Pradesh State Electricity Board and that the basis for the valuation of the steam generated was the saving in LSHS which would otherwise be the raw material

Page No. 13

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited for the generation of the steam. Whether the assessee was correct or otherwise in adopting a particular method for valuation does not fall for determination in these proceedings since the question to which the Court has to address itself is as to whether there was a full and true disclosure by the assessee. The assessee disclosed that it claimed a deduction under s. 80-IA. The computation of profits was disclosed. The break-up was explained. The assessee disclosed that its revenues were determined by taking two components viz. (i) the revenues relating to the generation of electricity and (ii) the saving on the cost of LSHS that was utilized in valuing the steam generation. In these circumstances, the Revenue is not correct in its submission that there was a failure on the part of the assessee to fully and truly disclose all the material facts necessary for the assessment. As a matter of fact we must also note that the submission which has been urged on behalf of the Revenue is that the issue was not considered by the AO when the order of assessment was passed. The question before the Court, however, is whether that in itself would justify the inference that a full and true disclosure was not made. Such an inference cannot be drawn since the record before the Court would show that as a matter of fact there was a full and true disclosure. Besides this, the attention of the Court has also been drawn to the circumstance that a similar claim of deduction under s. 80-IA has been consistently made and allowed in the case of the assessee since 1990-91. The record before the Court inter alia contains an application for rectification made by the assessee on 31st March, 1999 in respect of a deduction inter alia under s. 80-IA on the CPP units of the Mumbai and Vizag refineries, the P&L a/c for the Vizag refinery for 1995-96 which contains a similar computation of income including the saving in LSHS and an order dt. 6th April, 1999 passed under s. 154 by the Jt. CIT, Special Range-56, Mumbai. For all these reasons we are of the view that the first issue on which the assessment is sought to be reopened, the Revenue has failed to establish a case for the reopening of the assessment beyond four years.”

Page No. 14

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited 19. Coming to the Ground No. 2, the relevant facts are, during the course of assessment proceedings, Assessing Officer observed that assessee has claimed deduction under section 80IB of ₹.57846.06 lakh pertaining to Visakh Refinery Expansion Project II [in short “VREP-II”] at Visakh refinery, Andhra Pradesh and assessee had included the marketing margin of ₹.10158.56 lakhs in its claim of deduction under section 80IB of the Act.

Page No. 15

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited 21. On enquiry with the assessee, assessee has submitted detailed submissions vide letter dated 13.01.2022, the same is summarized by the Assessing Officer in his order as under: -

“10.1 The Assessee during the course of regular assessment proceedings has provided details in respect of Visakh Refinery Expansion Phase II [VREP-II) where deduction 80- IB of the Act has been claimed. The Assessee provided factual details pertaining to the VREP-II unit being commissioned in AY 2000-01 and commercial production started from AY 2001- 02 and the expansion resulted in increased capacity from 4.5 MMTPA to 7.5 MMTPA The expanded unit consists of independent units with a separate quid catalyst cracking unit and a crude distillation unit. The Assessee enclosed a technical write up regarding various units contained in the expansion unit along with a flow diagram. Further, the assessee also submitted approvals received from Ministry of Petroleum and Natural gas accepting the refinery unit as an independent unit for the purpose of fixing a separate refinery transfer price for the expanded unit. 10.2 The Assessee submits that the eligibility of the expansion unit for deduction under section 80-I was considered by the AO for AY 1990-91 when the first phase of expansion had eligible profits for deduction under the relevant section. The Assessee submits that the assessment order for AY 1990-91 accepted the claim of deduction under section 80-1 of the Act. The deduction under section 80-I including marketing margin was adjudicated by the CIT(A) for AY 1990-91 and the CIT(A) vide its order dated 15 September 1993 held that profits made by the expanded unit should also include marketing profits for computation of eligible profits of Visakh refinery expansion unit and Mumbai refinery expansion unit. The order of the CIT(A) has been submitted by the assessee during the course of the regular assessment. The CIT(A) order has been accepted by the department and no appear has been filed. The issue of inclusion of marketing profit for computing the eligible profits for deduction under section 801 therefore reached finality. Based on the Supreme Court decision of Berger Paints (266 1TR 99) where the department has not challenged the correctness of the law and has accepted it, there can be no cause to justify departure from the laid down principle. 10.3 The Assessee also submits that the Mumbai tribunal order in its own case for AY 1984-85 held that marketing division is an

Page No. 16

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited integral part of the total manufacturing activity undertaken by the company. The Tribunal also held that the business of the company is one single integrated and indivisible business of manufacturing and marketing of petroleum products. Thus, during the course of original assessment proceedings detailed submissions were made regarding inclusion of marketing profits for the purpose of computing the eligible profits for deduction under section 80-IB of the Act. 10.4 The Assessee submits that the Bombay High Court in its own case for AY 1989-90 vide order dated 24 July 2006 has allowed the claim of deduction from AY 1989-90 in case of VREP-1 and Mumbai refinery expansion unit. Since, the Bombay High Court decision is on the same issue there in no question of disallowing the marketing margin from the profits of the VREP-11 unit and the AO has rightly been allowing the claim right from AY 1989-90 to AY 2005-06, Hence, the Assessee submits that there is no reason to believe that income escaped assessment and reconsideration of the same issue on the same set of facts will therefore mean only a change of opinion and there is no reason to believe that income has escaped assessment. 10.5 The Assessee has relied on the Bombay High Court in its own case for AY 2002-03 in Hindustan Petroleum Corporation Limited v. DCIT (2010) 328 ITR 534 where a deduction under section 80-IB was made in respect of the VREP-11 project. The assessee had provided details during the course of assessment and clarified that Ministry of Petroleum and Natural Gas had granted approval to treat additional capacity of the expanded project at par with that if new refineries for the purpose of payment of import parity price and the assessee disclosed all the relevant details for deduction under section 80-IB of the Act. Therefore, based on the above submissions and by placing reliance on the aforesaid decisions, the deduction under section 80-IB of the Act ought to be granted to the Assessee.”

“11.1 The assessee has heavily relied on the judgment of Mumbai High Court in assessee's own case for the A.Y. 2002-03 (328 ITR 534), in that case the issue under consideration was validity of the notice issued u/s 148 after expiry of four years. The Hon'ble High

Page No. 17

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited Court had quashed the reopening proceedings while observing that there was no failure on the part of assessee to disclose material facts during original proceedings and hence after expiry of four years the reopening was not justified. It is reiterated that the Hon'ble High Court has not given any finding on merits of any issue involved in that case. The other judgements relied upon by the assessee have different facts and hence not applicable to the case of assessee. 11.2 In the case of India leather Corporation P. Ltd Vs CIT (SC) 227 ITR 552, the Hon'ble Supreme Court has held : The phrase "derived from " is different from "attributable to"- It is no doubt true that the words 'attributable to have a wider meaning than the words 'derived from'- But at the same time it cannot be ignored that normally the word 'attributable' implies that for a result to be attributable to anything' it must be wholly, or in material part, caused by that thing- In order that income can be said to be attributable to manufacture or processing of goods, the earning of the income must be directly connected with manufacture or processing of goods. It is also necessary that material part of the said income should have been earned by that activity. 11.3 Further, in the case of Liberty India Vs CIT (SC) 317 ITR 2318 the Hon'ble Apex Court has held as under: "By using the expression 'derived from Parliament intended to covers sources not beyond that first degree- DEPB / Duty drawback are incentive which flow from the schemes framed by Central Govt, or Customs Act and hence they belong to the category of ancillary profits of such undertakings- Not derived from the industrial undertaking- Further, they cannot be reduced from the cost of purchase of manufacture of goods and they should be treated as separate items of revenue or income and accounted accordingly." 11.4. The decision of the Apex Court in the case of Cambay Electrical Supply Co. Ltd. (113 ITR 84) highlights the distinction between the two expressions. According to the Hon'ble Apex Court, the expression 'attributable to as a much wider import than the expression 'derived from' thereby intending to cover receipts from sources other than the actual conduct of the business of the industrial undertaking. In other words, it can be understood to mean that there can be receipts which are incidental to the actual conduct of the business of industrial undertaking yet the same may

Page No. 18

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited not fall within the expression of 'derived from' so as to be eligible for the benefits envisaged under Section 80-IA of the Act. 11.5. In view of the above fact and legal position, it is concluded that the Marketing margin doesn't fall under the purview of "derived from". The Marketing margin at best falls under the category of "attributable to" and not "derived from" manufacturing or production activities. Such profits do not come within first degree source from the eligible business. The nexus between the Marketing margin and the industrial undertaking is not direct but only incidental Accordingly, it is held that assessee's income to the extent of Rs. 10158.56 lakh on account of Marketing margin is not eligible for deduction u/s 80 IB of the IT and hence disallowed.”

Page No. 19

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited wherein Ld. CIT(A) has allowed the claim of the assessee merely relying on the decision of the ITAT, Mumbai bench in assessee’s own case. He submitted that Ld. CIT(A) has not appreciated the facts on record and merely following the decision in assessee’s own case passed earlier, allowed the claim of the assessee. Therefore, this issue may also be remitted back to file of the Ld. CIT(A).

Page No. 20

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited claim of the assessee was allowed. Further, he brought to our notice decision of the CIT v. Indian Aluminium Co. Ltd. [108 ITR 367] wherein similar claim was allowed.

“52. We have considered the rival contention of the parties and perused the order of authorities below. We have noticed that the

Page No. 21

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited AO not disputed the market price of cost of processing VGO in all refinery units. However the same was considered to be below the crude oil price and was not accepted by AO. The AO further observed that assessee is required to include at least cost of processing crude oil to VGO in computing the price of inter-unit transfer. The AO further concluded that the assessee was required to submit average processing cost in CDU and the same works out to be Rs. 36.24/MT. The AO accordingly took Rs. 14400.79/mt as the transfer price of MT VGO. And inter-unit transfer was calculated at Rs. 1204.19 crore reducing the net profit of the VERP II of Rs 664,51,07,775/-. The ld CIT(A) while considering this ground of appeal concluded as under: “10.6 I have carefully considered the submission of ld AR and gone through the facts brought before me. As I filed, the AO has mentioned the market price in his order and has not disputed the same. Since the market price is lower than the value adopted by the appellant there is no reduction of cost resulting in inflation of the profit of the eligible unit and thereby a claim of deduction under section 80I. In fact by adopting the value which is substantially higher than the market price, the appellant has increased its cost, reduced the profits of eligible unit and thereby has claimed a lesser reduction under section 80 IA then what could have been calculated if market price of the product was adopted. In such a scenario there was no region for the AO to disturb the calculation made by the appellant. He has increased the value only marginally from 14.365 p.m. to 14.479 p.m. own estimate basis which cannot be accepted under the circumstances. 10.7. Taking into consideration the entirety of the facts and circumstances of the appellant’s case and the relevant provision of the Income Tax Act, I find no reason to support the action of AO. Accordingly he is directed to accept the appellant’s claim of profit from the VERP II for the purpose of deduction under section 80 IB. This ground of appeal is allowed. 53. We have seen that the ld Commissioner (Appeals) granted the relief after considering the entire fact related with the claim of assessee. We do not find any reason to differ with the finding of learned Commissioner (Appeals). Thus this ground of appeal is dismissed.”

Page No. 22

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited 27. Respectfully following the above decision, we are inclined to allow the claim raised by the assessee. Accordingly, Ground No. 2 raised by the revenue is dismissed.

“That the head shown as expenses construction' is actually 'M & R - Expensed Construction. As er the assessee expenses guidelines, these expenses are incurred for modification, relocating realignment and reinstallation of tanks, pumps, dispensing units, electrical systems etc. to maintain operation at current levels and are charged to 'expensed construction'. Any expenditure incurred for modification which results in increasing capacity / efficiency are

Page No. 23

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited capitalized in the books of accounts. The assessee also furnished a detailed break up of location wise expenses amounting to Rs.5,66,81,860/-. The assessee submitted that the expenses are pure maintenance and repair activities that are charged to this account and hence are purely revenue in nature and allowable under section 37(1) of the Act and the same cannot be capital in nature." The assessee has also relied on CIT Vs. Madras Auto Services P. ltd (1998)233 ITR 468 (SC) and other cases to support its case that the impugned expenditure are revenue in nature.

“14. I have considered the submission made by the assessee. I have also gone through the relevant provisions and judicial pronouncements on the subject. The decisions being relied upon by the assessee have the facts, different from assessee's facts and hence not applicable here. Revenue expenditures are short-term business expenses usually used immediately or within one year. They include all the expenses that are required to meet the current operational costs of the business, making them essentially the same as operating expenses. Tracking revenue expenditure allows a business to link earned revenue with the business operations expenses incurred during the same accounting year. Capital expenditures are funds that a company uses to acquire, improve, or maintain physical assets (land, property, equipment software) or intangible assets (patents or licenses). Capital expenditure is generally used to improve the company's capacity or efficiency. 14.1 As regard legal position on the subject, in the case of Arvind Mills Ltd Vs CIT 197 ITR 422 (SC) it has beds held that Capital expenditure would not become revenue expenditure simply by reasons that it was incurred in connection with business activities which ultimately resulted in efficiently carrying on day-to-day business. In the case of Devidas Vithaldas & Co. Vs CIT 84 ITR 277 (SC) it has been held that the expression 'enduring benefit' and rights of permanent nature are only descriptive and not definite

Page No. 24

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited and are relative in meaning not synonymous with 'perpetual' or 'everlasting'. In the case of K.T.M.T.M. Abdul Kayoom Vs. CIT (SC) 44 ITR 689 it has been held that to decide whether an expenditure is capital or revenue in nature what is decisive is the nature of the business. the nature of the expenditure, the nature of the right acquired and their relation, inter se. 14.2 In its submission dated 15.02.2022 and during the course of VC the assessee has reiterated the arguments made in earlier reply dated 13.01.2022 which have been duly dealt in the preceding para and hence not repeated. 14.3 In the impugned case, the expenditure has been incurred for modification, relocating realignment and reinstallation of tanks, pumps, dispensing units, electrical systems etc.. Any expenditure incurred for modification which results in increasing capacity/ efficiency are capitalized in the books of accounts. The assessee has derived benefit of enduring nature by incurring such expenditure. In view of such fact legal provision, the impugned expenditure of Rs. 5,66,81,860/- are considered to be capital in nature and hence disallowed while computing assessee's income from business. This means an addition of Rs. 5,10,13,678/- [Rs. 56681860 - Rs. 5668186/- (depreciation @ 10%)] to the total income of assessee. (Addition Rs. Rs. 5,10,13,678/-)”

“7.3.5 It is seen from that assessment order that the Ld. AO has not brought any cogent evidence against the claim of the appellant regarding the expenses being of revenue in nature. The appellant being a respectable PSU, there remains no reason for not relying upon the version presented by them. It is held that the ground take by the appellant that expenses are pure maintenance and repair

Page No. 25

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited activities that are charged to P & L account and hence are purely revenue in nature and allowable under section 37(1) of the Act. Therefore, Ground No. 3 taken by the appellant is allowed.”

Page No. 26

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited various locations. Therefore, it cannot be termed as a capital in nature. He supported the findings of the Ld. CIT(A).

Page No. 27

ITA NOs. 1994 & 1995/MUM/2023 CO NOs. 109 & 110/MUM/2023 Hindustan Petroleum Corporation Limited ITA No. 1995/MUM/2023 (A.Y. 2004-05)

Order pronounced in the open court on 07th February, 2024.

Sd/- Sd/- (ABY T VARKEY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 07.02.2024 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum

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