DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2, NAGPUR vs M/S SUNFLAG IRON & STEEL CO. LTD , NAGPUR

Income Tax Appellate Tribunal, NAGPUR BENCH

Before: SHRI S.S.GODARA & DR. DIPAK P. RIPOTE

For Appellant: Shri Rachit Thakar – AR

For Respondent: Shri Abhay Y. Marathe - DR

Hearing: 20/02/2024Pronounced: 15/03/2024

PER DR. DIPAK P. RIPOTE, AM:

This is an appeal filed by Revenue against the order of Commissioner of Income-tax (Appeals)-2, Nagpur, dt. 30-09-2019 for Assessment Year 2010-11 emanating from Assessment order dt. 15-06-2015 passed u/s.143(3) r.w.s.263 of the Income-tax Act, 1961 (hereinafter referred to as ‘The Act’). The Grounds of appeal are as under :

“Whether in facts and circumstances of the case and in law was the CIT()-2, Nagpur justified in restricting the apportioned expenditure in the ratio o 95.25% and 4.75% respectively towards the Steel Manufacturing Unit and Power Plant?”

M/s. Sunflag Iron & Steel Co. Ltd.

BRIEF FACTS OF THE CASE :

Assessee had filed return of income on 25-09-2010. Then assessment order was passed u/s.143(3) on 14-03-2013. Subsequently, Pr. CIT, Nagpur passed an order u/s.263 of the Act. Assessing Officer passed an order u/s.143(3) r.w.s.263 on 15-06-2015. The issue involved in the assessment order was allocation of Director’s remuneration to Captive Power Plant. Assessee company is engaged in manufacturing steel items. The assessee has also established a Thermal Power Plant. Electricity generated from the thermal power plant is captively used in steel plant. As and when there is excess electricity generated, it is given to the MSEDCL. The assessee has claimed deduction u/s.80IA on the profit of the power plant, the power plant herein onward referred as Captive Power Plant (CPP). Assessee has debited an amount of Rs.7,98,57,773/- under the head ‘Directors Remuneration’. The assessee had allocated Rs.9,35,635/- for CPP as expenditure. The Assessing Officer in the assessment order held that the allocation of the amount of Rs.9,35,635/- was inappropriate.

Assessing Officer allocated Rs.1.56 crore to CPP as expenditure out of the total Directors remuneration u/s.80IA (10) of the Act. The Assessing Officer has not given any reason/basis for said allocation. 2 Aggrieved by the assessment order, the assessee filed an appeal before

M/s. Sunflag Iron & Steel Co. Ltd. the ld.CIT(A). Ld.CIT(A)after considering the submission of the assessee allocated the Directors remuneration on the basis of the turnover of the steel plant and turnover of the power plant. Ld.CIT(A) observed that turnover of the steel plant was 95.02% of the total turnover and turnover of the power plant was 4.98%, Ld.CIT(A) allocated the Directors remuneration in the ratio of 95.25% and 4.75% to steel plant and power plant respectively. Aggrieved by the order of CIT(A), Revenue has filed appeal before this Tribunal.

SUBMISSION OF LD. AUTHORISED REPRESENTATIVE (AR): 3. “Respondent-Assessee respectfully begs to submit as under : 1] In the present Appeal of the Dept, the issue involved is about the allocation of expenses of Director's remuneration between Assessee's Steel Plant (which is the main business) and Assessee's Power Plant which is eligible to 80IA deduction. Relevant facts are stated below. 2] Assessee has a large steel plant for production and sale of special steel of different qualities. The turnover of Steel Plant is about Rs.1354 Crore (Rs. 1354,59,08,411/-). Assessee has also established a power plant (caption power plant CPP) for production of electricity which is mainly supplied to the steel plant, and when steel plant is under repair or maintenance etc. the electricity produced during the said period is banked with MSEDCL (Maharashtra State Electricity Distribution Co. Ltd.) for which MSEDCL pays to the Assessee co. by adjustment. Revenue of Power Plant is thus from Assessee's Steel Plant & from MSEDCL. Revenue of Power Plant is about Rs.67 Crore (Rs.67,58,67,432/-). Thus turnover of Steel Plant is about 95% and that of Power Plant (CPP) is about 5% to total turnover. 3] Power Plant of the Assessee is eligible for 80IA deduction. Income of Steel Plant and Power Plant are computed by deducting direct and indirect expenses from their respective turnover on actual basis. However a few expenses are common between steel plant and power plant. They are allocated on rational basis between steel plant and power plant. Such 3 expenses are that of interest and Director's remuneration including commission. There is no dispute about the allocation of interest expenses between the two. The dispute in this Appeal is about the allocation of Director's remuneration between steel plant and power plant.

M/s. Sunflag Iron & Steel Co. Ltd.

4] During the year total remuneration and commission to Directors was Rs.7,98,57,773/- out of which Rs.9,35,635/- was allocated towards power plant (CPP) and the balance Rs.7,89,22,138/- was allocated toward steel plant which percentagewise 1.2% for power plant and 98.80% for steel plant. 5] In assessment proceedings the learned A.O. considered the allocation of Rs.9,35,635/- to CPP as low and accordingly A.O. made additional allocation of Rs. 1,56,00,000/- and allocated total salary of Rs. 1,65,35,635/- to power plant, thereby reducing the income of power plant by Rs. 1,56,00,000/- and consequently reduced 80IA claim by Rs. 1,56,00,000/-. A.O. thus reduced the total claim under 80IA by Rs.1,56,00,000/- and consequently added Rs.1,56,00,000/- to the total income of the Assessee. 6] In Appeal before CIT(A) it was contended that once the power plant is established nothing is required to be done by the Directors. Power Plant is looked after by Engineers and the supply of electricity is to Assessee's own plant and to MSEDCL. Thus no effort or attention of Directors' are required for running of power plant. As against that in respect of Steel Plant which the main and only business of the Assessee the Directors have to devote full time and energy for the same. The turnover of steel p ant is about Rs.1350 Crore and has been increasing year after year due to efforts of Directors only. Presently it has reached more than Rs.2000 Crore out of which about 35% is export. The directors have to look after timely procurement of raw material on continuous basis, have to see that the production goes on smoothly without any break down, have to have liason with customers to increase their sales and keep the customers satisfied, have to attend to various legal obligation arising in the course of the steel business. Thus the allocation of Director's remuneration between steel plant was fair and reasonable. Learned CIT(A) found that the turnover of Steel Plant was about 95% and that of CPP Power Plant was 5%. Accordingly he directed A.O. to allocate Directors' remuneration at 95% and 5% between steel plant and power plant in place of allocation made by Assessee approximately at 98% and 2% respectively between steel plant and power plant and accordingly he partly allowed Assessee's Appeal. Against this order the Dept. is in appeal. 7] It may be noted that the same issue of allocation of Directors' remuneration between Steel Plant and Power Plant had arisen in earlier assessment years viz. A.Y.2008-09, 2009-10 and later year A.Y.2011-12, 2012-13 and 2013-14 and in all those years learned CIT(A) has directed A.O. to make allocation of salary between steel plant and power plant at 95% and 5% respectively in place of about 80% and 20% made by A.O. Revenue has accepted all those orders of CIT(A) on the said finding and 4 have not filed any appeal before ITAT against those orders/findings. For ready reference the Appeal orders of CIT(A) for A.Y.2008-09 and 2009- 10 are filed herewith. In view of this fact and the facts submitted above the allocation as per CIT(A)'s order is fair and reasonable and there is no M/s. Sunflag Iron & Steel Co. Ltd. need to interfere with CIT(A)’s order. In view of the above the Dept’s appeal be deserves to be dismissed. Appeal of Dept. be kindly dismissed.”

SUBMISSION OF LD. DEPARTMENTAL REPRESENTATIVE (DR) :

Learned DR relied on the order of Assessing Officer.

FINDINGS AND ANALYSIS :

We have heard both the parties and perused and records. The only issue before us is allocation of Directors remuneration. For A.Y. 2010- 11 total directors remuneration was Rs.7,98,57,773/-. The Assessing Officer in the assessment order has allocated Rs.1.56 crore out of total Rs.7,98,57,773/- to Captive Power Plant. The Assessing Officer has not provided any basis for the said allocation. Rather the allocation is arbitrary. We agree with the allocation key used by Ld.CIT(A).

Ld.CIT(A) has allocated directors remuneration in the ratio of turnover.

Total turnover of the assessee : Rs.14,22,17,75,843/- Turnover of the Steel plant : Rs.13,54,59,08,411/- 95.02% Turnover of the Power Plant : Rs.67,58,67,432/- 4.98% Ld.CIT(A) has allocated 4.75% of directors remuneration to the Captive Power Plant. We agree with the assessee that once the power plant was established, directors involvement was not required in day to day operations. The power plant is mainly for captive consumption. 5 The excess power is automatically sold to MSEDCL, which gives credit in the electricity bill to the assessee. Thus, directors involvement

M/s. Sunflag Iron & Steel Co. Ltd. in power plant is minimal. In these facts and circumstances, we agree with the allocation done by ld. CIT(A). Accordingly, Revenue’s ground is dismissed.

In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open Court on 15th March, 2024.

DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2, NAGPUR vs. M/S SUNFLAG IRON & STEEL CO. LTD , NAGPUR