SHRI HARI KRISHNA PAPERS PRIVATE LIMITED,UDAMALPET vs. ACIT, COIMBATORE

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

This appeal by assessee is directed against the order of the Commissioner of Income Tax (Appeals)-II, Coimbatore, dated 16.01.2014 for the assessment year 2009-2010.

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of deduction claimed u/s.80IA of the Act on turbine division in respect

of profit derived at �83,94,236/-.

the year 1989. Manufacturing of paper involves various processes.

One of the processes involves production of steam which was

required for heating of dryer cylinders of the paper factory. The

assessee company was using boilers and pressure reduction valves

to heat the dryer cylinders of the paper factory till the year 2002. Use

of this technology involves loss of energy in the steam. During the

year 2003, the assessee company started using FBC boilers and

steam turbines instead of normal boilers and pressure reduction

valves basically to recover the energy from the steam through

generation of power. The power (i.e. recovered energy from steam)

thus produced from the steam was recycled to the paper division

resulting in less consumption of power by the factory. The company

constituted these FBC boilers and Steam turbine (steam production

process of the paper industry) into a new undertaking viz. Turbine

Division and started claiming deduction u/s 80lA of the IT Act. The

company valued the power thus claimed to be produced from steam

at �.96,57,543/- (@ Rs. 3.5 per unit) and charged the same to the

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paper division of the company. Accordingly, the profits of the paper

division were reduced by �96,57,543/- and correspondingly arrived at

the profits of �83,94,236/- in steam turbine division (after claiming

other expenditure (depreciation, Insurance and repairs and

maintenance) of �12,63,307/- & claimed the same as deduction u/s

80lA of the IT Act for the assessment year 2009-10. Accordingly, the

assessee claimed turbine division has a separate independent division

which was constituted with the use of FBC boilers and Steam turbine

instead of old boilers and pressure reduction value to recover the

energy in the steam.

3.1 According to the Assessing Officer steam was required for

paper industry. Thus steam production was sine qua non for paper

production. All along paper division was using boilers and pressure

reduction valves for production of steam. There was considerable

loss of energy from the steam. In order to avoid such energy losses,

company opted a new system where new FBC boilers in combination

with steam turbine were used to produce steam as well as the

recover energy in the steam by way of electricity generation for

reuse. Thus, the new system has replaced the old system primarily

to supply steam to the paper industry and in the process energy was

recovered and reused. Therefore, according to the Assessing Officer

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the new system was very much a part and parcel of the paper

production and constitution of FBC boiler and steam turbine which

was required for existing production process into a separate

undertaking (turbine division) amounts to splitting up or the

reconstruction of the business already in existence and therefore the

assessee not entitled for deduction u/s.80IA of the Act. Further, the

Assessing Officer observed that turbine was not a new unit, it was

splitting up or reconstruction of the existing paper division.

Therefore, it cannot be considered as independent division so as to

grant 80IA deduction. According to the Assessing Officer for paper

manufacturing process, company created the same into a new

undertaking. With the result of new undertaking created by the

assessee, a part of the original business undertaking of the assessee

i.e. paper industry ceased to exist. The steam generation system of

the old one is not required when turbine division functions. If for any

reason, paper industry has to be relocated to a different place, the

Turbine Division also has to move to the location of paper division as

it cannot exist independently. According to the Assessing Officer the

technical persons examined under oath have admitted that the steam

turbine division cannot exist independently without paper division

indicating that turbine division was not created for generating

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electricity but to supply steam to paper industry. Thus, the company

has artificially bifurcated a production process in which the old

machinery was replaced by a new machinery which was only

required for paper industry and not for Turbine Division for

generating power. Thus the electricity generated was only an

incidental mechanism of the paper industry to save the energy from

the steam which otherwise would have lost if they continue to use

old boilers and pressure reduction valve. Therefore, the assets

acquired under so called Turbine Division are primarily meant for

production of steam and recover the energy loss from such steam so

as to make the paper industry more energy efficient. The steam

turbine division can work only when steam for paper industry runs. If

for any reason, if paper division stops, turbine division also has to be

stopped. Thus turbine division cannot exist without the paper division

of the company. Creating a part of existing paper production process

a separate division squarely amounts to splitting and into

reconstruction of business already in existence. Therefore, assessee

was not entitled to claim of deduction u/s 80lA of the IT Act on its

turbine division. According to the Assessing Officer the steam turbine

division used fuels costing an amount of �3,78,12,015/- to produce

steam. Therefore the cost on these fuels should be expenditure in

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the hands of the turbine division. However, the entire expenditure on

fuels used by the Turbine Division was charged to Paper Division and

the electricity recovered from steam and supplied to the paper

division was also charged to the paper division. Thus company has

created a situation where in the steam that comes

out of Turbine Division as 'waste' (since it has non marketable value

to third parties)was supplied to paper division and the entire cost of

fuels were charged to Paper Division in the guise of exchange of

steam which go as waste from the Turbine Division. If entire fuel

cost was charged to the paper division, the resultant steam energy

produced out of those fuels also should naturally belong to the paper

division and therefore part of the steam energy recovered through

generation of steam also should belong to the paper division.

Therefore electricity thus generated also should naturally belong to

the paper division and accordingly paper division should not be made

to pay for its own energy. Accordingly, the Assessing Officer rejected

the claim of 80IA deduction on the income derived from turbine

division. Aggrieved, the assessee preferred an appeal before the

Commissioner of Income Tax (Appeals). 4. On appeal, the Commissioner of Income Tax (Appeals)

observed that generation of electricity was consequent on the

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splitting or reconstruction of business already in existence and

therefore the assessee would not qualify for the deduction u/s.80IA of

the Act. The Commissioner of Income Tax (Appeals) observed that

the assessee was a manufacturer of papers and Cardboards

etc. One of the major component of the machinery was a

boiler unit which the assessee replaced by a more

sophisticated system which enabled it to recover the lost heat

and produce electricity. It was observed by the Commissioner

of Income Tax (Appeals) that the boiler and the turbine

producing the electricity sub serve the main business of the

assessee i.e. production of paper. The replacement of old

boiler by a new boiler which could make use of the wasted

heat energy does not become a distinct entity. In other words

the Turbine Unit has no independent existence of its own.

Therefore, the Commissioner of Income Tax (Appeals) in

agreement with Assessing Officer’s findings that the steam

turbine division cannot exist independently without paper

divisions indicating that the turbine division was not created

for generating electricity to supply steam to the paper

industry. So, the company has artificially bifurcated a

production process in which the old machinery was replaced

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by a new machinery which would require for paper industry.

This was not a new turbine division created for generating

power. Thus, the electricity generated was only an incidental

mechanism of paper industry to supply energy from steam

generator which would otherwise had gone waste. It only

makes use of the heat which was an incidental product. If

this fact was considered, the stipulation that the old

machinery used should not exceed 20% of the value of the

machinery used in new business required under explanation

(2) to section 80IA(3) will not be satisfied. To produce the

stream, not only the boiler but the whole incidental machinery

employed in the plant for such purpose has to be reckoned for

computing the value of old machinery used. Since the turbine

division cannot exist without paper division, the creation of

turbine division on existing paper production process would

not be a separate division but amounts to splitting up and

restructuring of business already in existence. Accordingly, the

Commissioner of Income Tax (Appeals) disallowed the claim

of the assessee u/s. 80IA of the Act. Against this, the assessee

is in appeal before us.

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5 The ld. Authorised Representative for assessee submitted

that the company opted a new system where new FBC boilers in

combination with steam turbine were used to produce steam as

well as to recover energy in the steam by way of electricity

generation for reuse. The company had invested �2,14,17,421/-

towards the above project. The system

was an integrated unit by itself and it functions independently. The

finding of the CIT(A) that the steam turbine division cannot exist

independently without paper division was totally against fact. The

finding of the authorities that the technical persons examined

under oath have admitted that the steam turbine division cannot

exist independently without paper division was also totally incorrect

and against fact. No person was examined by the authorities at all.

No part of the existing undertaking was transferred to the new

undertaking. The entire investment of �2,14,17,421/- was new

purchases and expenses incurred towards the new undertaking

only. It was all a new and identifiable undertaking separate and

distinct from the existing business. Reconstruction of business

involves the carrying on substantially the same business. But in

this case the existing unit was for production of paper whereas the

new undertaking was production of power. It was also nowhere

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evident that the old industrial unit was split up or damaged or

destroyed that was supposedly reconstructed as a new unit by the

assessee. The existing paper division continues its activities as

before. The term split up of the business already in existence

indicated a case where the integrity of a business earlier in

existence was broken up and different sections of the activities

previously conducted are carried on independently. In this case

there was no finding by the authorities that the existing business

was broken up into different sections and carried on independently.

5.1 The ld. Authorised Representative for assessee relied on

the judgment of Supreme Court in the case of Textile Machinery

Corporation Ltd vs. CIT 107 ITR 0195 wherein it was held that

‘’If any undertaking is not formed by reconstruction of the old business that undertaking will not be denied the benefit of Sec. 15C simply because it goes to expand the general business of the assessee in some directions. As in the instant case, once the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without complete absorption and losing their identity in the old business, they are not to be treated as being formed by reconstruction of the old business’’.

5.2 The ld. Authorised Representative for assessee further

relied on the judgment in the case of CIT vs. Madras Rubber

Factory Ltd 149 ITR 405 wherein it was held that

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On the facts of the present case, there is absolutely no evidence to indicate that any asset of the existing undertaking had been transferred to the new unit at Kottayam. It is also seen that the Kottayam unit was set up with new plants and machinery for producing masticated rubber. Though a substantial portion of the masticated rubber produced by the Kottayam unit is used up by the existing undertaking of the assessee- company, it cannot be said that the Kottayam unit was established in the process of reconstruction of the existing business or establishment. The decision of the Supreme Court referred to above, therefore, squarely applied to the facts of this case. The decision of the Tribunal in this case is quite in accord with the view expressed by the Supreme Court in the above case.

5.3 The ld. Authorised Representative for assessee

submitted that in the case of CIT vs. Hindusthan General Industries

Ltd. 137 ITR 851 wherein it was held that

The present case does not come with the words, "splitting up of the business already in existence." This expression indicate a case where the integrity of a business earlier in existence is broken up and different sections of the activities previously conducted are carried on independently. In the present case, there is no finding that the unity and integrity of the business or undertaking which had been established suffered in any manner as a result of the establishment of the new unit ………………………..

There is nothing to show that as a result of the setting up of this undertaking, the integrity, unity of the continuity of the business transaction the earlier undertaking were in any manner adversely affected. This was a new, independent and viable unit which produced similar, if not the same, commodities as were produced by the earlier factory. The mere fact that while setting up this factory, a small amount of plant and machinery was transferred from the previous business cannot be conclusive to come to the conclusion that it is a reconstruction …………………………….

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The concept of reconstruction should be looked at from a substantial point of view and for the reasons already stated the present case cannot be said to be one of reconstruction.

5.4 The ld. Authorised Representative for assessee further

submitted that in the case of CIT vs. Mahaan Foods Ltd 216 CTR 148

wherein it was held that

As for 'reconstruction' of the business, it is nowhere evident that the old industrial unit was split up or damaged or destroyed that was supposedly reconstructed as a new unit by the assessee. What the assessee has done is to set up an industrial undertaking with latest technology and with increased capacity and of course, with a fairly good amount of fresh investment

5.5 The ld. Authorised Representative for assessee further placed

reliance in the case of JCIT vs. Associated Capsule (P) Ltd. 114 ITD

189 wherein it was held that

Held that some post manufacturing activities are common or there are common source of production, the benefit of deduction of 80lA cannot be denied to the undertaking. So long there is no reconstruction of existing undertaking and so long as the undertaking is independently formed with a new Plant and Machinery and such an undertaking is new and the deduction cannot be denied.

and accordingly prayed for allowing the claim u/s.80IA of the Act.

6 On the other hand, the Departmental Representative relied on

the orders of the lower authorities.

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record. The assessee company was engaged in manufacture of paper

and production of electricity from windmills upto the assessment year

2003-04. The assessee company constructed co-generation building

during financial years 2003-04 and 2004-05 to house the new Turbine

cum boiler unit to produce steam and electricity. The company

invested �1,77,39,233/- towards co-gen machinery and invested

�36,78,188/- in co-gen building totalling � 2,14,17,421/- towards new

unit. The company also received term loan assistance from SBI,

Commercial Branch, Coimbatore for a sum of �1,50,00,000/- for new

investments. Separate books of accounts were maintained for the new

unit. The unit started operation since September 2004. The year wise

power generated from September 2004 to 2009 was provided to the

assessing officer. The assessee started claiming deduction u/s 80lA

from Assessment year 2008-09 onwards which was accepted by the

department. The department allowed 80lA deduction as claimed by

the assessee for the assessment years 2010-11 and 2012-13 under

scrutiny assessment u/s 143(3). The assessee company filed its return

of income for the assessment year 2009-10 on 28/09/2009, declaring

total income of �2,51,37,806/- under normal provisions and book profit

of �4,02,67,104/-. Form No. 10CCB - Audit Report u/s 80lA dated

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31.08.2009 was also submitted. However, deduction u/s 80IA was not

granted to the assessee on the reason that it was splitting up or

reconstruction of existing business and the assessee has not

established any new industrial undertaking. According to the Assessing

Officer the steam turbine division was not created for generating

electricity but to supply steam to paper industry and the assessee has

artificially bifurcated a production process in which the older machinery

were replaced by a new machinery which was only required for paper

industry and not for turbine division for generating power. According

to the Assessing Officer the electricity generated was only an incidental

mechanism of the paper industry to save the energy from the steam

which otherwise would have lost if they continue to use old boilers and

pressure reduction valve. Therefore, the assets acquired under so

called Turbine Division are primarily meant for production of steam and

recover the energy loss from such steam so as to make the paper

industry more energy efficient. The steam turbine division can work

only when steam for paper industry runs. If for any reason, if paper

division stops, turbine division also has to be stopped. According to

the Assessing Officer the turbine division cannot exist without the

paper division of the company. Creating a part of existing paper

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production process into a separate division squarely amounts to

splitting and reconstruction of business already inexistence. Therefore,

the Assessing Officer was of the opinion that the assessee was not

entitled to claim of deduction u/s.80IA of the Act on its turbine

division. In order to decide the above issue, we first proceed to

examine the legal position in this regard.

the Act which was amended by the Finance Act, 1999 w.e.f. 1st April,

2000. The deduction under s. 80-IA was available to an assessee

whose gross total income included any profits or gains derived from

any business of an industrial undertaking which fulfilled all the

conditions laid down in that behalf in sub-s. (2) of the section. The

sub-s. (2) of s. 80-IA, as applicable to this assessment year 2009-

2010,inter alia, reads as under :

(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park (or develops a special economic zone referred to in clause (iii) of sub-section (4) or generates power or commences transmission or distribution of power (or undertakes substantial renovation and modernization of the existing transmission or

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distribution lines (or lays and begins to operate a cross –country natural gas distribution network))).

(3) This section applies to an undertaking referred to in clause (ii) or clause (iv) of sub-section (4) which fulfils all the following conditions, namely :—

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose:

Provided that nothing contained in this sub- section shall apply in the case of transfer, either in whole or in part, of machinery or plant previously used by a State Electricity Board referred to in clause (7) of section 2 of the Electricity Act, 2003 (36 of 2003), whether or not such transfer is in pursuance of the splitting up or reconstruction or reorganisation of the Board under Part XIII of that Act.

Explanation 1.—For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :—

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

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(b) such machinery or plant is imported into India from any country outside India; and

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the assessee.

Explanation 2.—Where in the case of an undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.

industrial undertaking. Therefore, whenever an assessee claims relief

u/s. 80-IA, the assessee will have to establish that a new unit had

come into existence which independently produced articles and that

this new unit was not dependent upon the old existent unit, in the

sense that the new unit could not be equated as an expansion of the

old unit.

burden lies upon him to produce cogent material in support of his

claim. In order to avail tax concession u/s. 80-IA, employment of fresh

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capital in the new unit is imperative. But it does not mean that for the

employment of the capital, it should have been newly raised. If

surplus/reserve capital is available with an assessee in its existing

business, the assessee can utilize such capital for the purpose of plant,

machinery, etc., for the new unit.

business should be understood in a broad commercial sense from a

commonsense point of view and only in relation to the new industrial

undertaking claiming the concession.

capital and manufactured or produced articles yielding additional

profits having a separate physical independent existence, it was a new

industrial undertaking eligible for tax concession.

part of an already existing industrial establishment may result in an

expansion of the industry or the factory, but if the newly established

unit is itself an integrated independent unit in which new plant and

machinery are put up and are themselves, independently of the old

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unit, capable of production of goods then it can be classified as a

newly established industrial undertaking.

new plant and machinery and by investing substantial funds may

produce the same commodity as of the old business or it may produce

some other distinct marketable products, even commodities which may

feed the old business. These products may be consumed by the

assessee in its old business or may be sold in the open market. One

thing is certain that the new undertaking must be an integrated unit by

itself wherein articles are produced. The industrial unit must be new in

the sense that new plant and machinery are erected for producing

either the same commodity or some other distinct commodity. The

benefit cannot be denied merely because the new undertaking goes to

expand the general business of the assessee in some direction.

enunciated in the above paras, we are of the opinion, that the crucial

question that has to be answered is whether, on the facts of the case,

the new industrial unit can be said to have come into existence within

the meaning of sub-s. (2) of s. 80-IA, so as to be eligible for deduction

under s. 80-IA for assessment year 2009-2010.

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(i) Whether the machines costing ₹1,77,39,233/- ₹36,78,188/-, and building which were made during the assessment years 2003-2004 and 2004-2005 (before 31st March, 2005), brought into existence an integrated independent unit, which by themselves, independently of the old unit, were capable of producing the steam and electricity. 16. We find that the assessee company commenced a distinct

industrial undertaking for the generation of power. It is an undisputed

fact that the premises of this undertaking are distinct from the paper

unit as separate building was constructed vide approval No.

15442/2003 at survey Nos.417, 423, 424 & 426 at Nallur Village,

Pushpathur Panchayat, Palani Taluk, Dindigul District. Separate

technology is used and loan was also obtained from State Bank of

India, Commercial Branch, Trichy Road, Coimbatore. The lower

authorities are not correct in holding that the power plant was not a

distinct unit. The true principle as laid down by the Apex Court, in the

case of Textile Machinery Corporation Ltd., Vs. CIT 107 ITR 195,

directly and squarely applies to the facts of the case. In the instant

case, the true test is not whether the new industrial undertaking

connotes expansion of the existing business of the assessee but

whether it is all the same a new an identifiable undertaking separate

and distinct from the existing business of the assessee but whether it

is all the same a new and identifiable undertaking separate and distinct

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from the existing business. For the assessment year 2008-2009, the

lower authorities for co-generation plant granted deduction u/s.80IA of

the Act. They impliedly agreed that the new machinery and plant have

been installed under separate premises and it is not appropriate to

deny the same deduction for the assessment year 2009-2010.

[supra] was concerned with the clause dealing with reconstruction of

existing business but the expression 'not formed' was construed to

mean that the undertaking should not be a continuation of the old but

emergence of a new unit. Therefore, even if the undertaking is

established by transfer of building, plant or machinery, it is not formed

as a result of such transfer, in our considered view; the assessee could

not be denied the benefit. We also find that a new undertaking for

manufacture of power with steam as by-product was formed out of

fresh funds, in separately identifiable premises, under a separate

license/approvals with manifold increase in capacity with new

machinery and buildings without transfer of any portion of the old

buildings or machinery which pre-existed. The power and steam

produced earlier was part of the paper unit and could service only the

paper unit and hence was at best by-product of the paper unit

manufacturing facility. The new unit had power as the main product

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and apart from servicing the captive consumption in the paper unit

also could service the other power requirements. The pricing of power

is also subjected to the various power tariff prescriptions. It can be

clearly seen that the new undertaking is therefore not formed by the

splitting up of the old undertaking. There is no case also made out by

the lower authorities that the new undertaking is formed by the

splitting up of the existing business. Further, the Supreme Court in the

case of Textile Machinery Corporation (cited supra) wherein the

Supreme Court categorically held that new unit established by the

assessee for manufacturing articles used as intermediate products in

the old division, which the assessee was buying from the market

earlier, is not reconstruction of business already in existence. To

constitute reconstruction, there must be transfer of assets of the

existing business to the new industrial undertaking. In our opinion,

generation of power unit is separate and distinct undertaking for which

separate approval was obtained and it cannot be said that splitting

of existing business structure. Therefore, in our considered opinion,

the lower authorities are not correct in denying the deduction under

section 80IA of the Act. Hence, we decide this issue in favor of the

assessee company and against the Revenue.

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disallowance of bonus and exgratia payment of �19,88,890/-. The ld.

Authorised Representative for assessee has not pressed this ground

before us and accordingly, we dismisses this ground of the assessee as

not pressed.

interest u/s.234A, 234B & 234C of the Act. Since, the interest is

mandatory and consequential in nature, the same is to be considered

by Assessing Officer while passing consequential order. Accordingly,

this ground is disposed of.

No.633/Mds/2014 is partly allowed. Order pronounced on Friday, the 24th day of July, 2015, at Chennai.

Sd/- Sd/-

(च�ला नागे�� �साद ) (चं� पूजार� ) (CHALLA NAGENDRA PRASAD) (CHANDRA POOJARI) �या�यक सद�य/ JUDICIAL MEMBER लेखा सद�य/ ACCOUNTANT MEMBER चे�नई/Chennai. �दनांक/Dated:24.07.2015. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2.��यथ�/ Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.

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