Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI CHALLA NAGENDRA PRASAD
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.
I.T.A.No.633/Mds/2014. :- 2 -:
The first ground raised in this appeal is with regard to rejection of deduction claimed u/s.80IA of the Act on turbine division in respect of profit derived at �83,94,236/-.
Originally the assessee company started its paper division in 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 I.T.A.No.633/Mds/2014. :- 3 -: 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 I.T.A.No.633/Mds/2014. :- 4 -: 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 I.T.A.No.633/Mds/2014. :- 5 -: 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 I.T.A.No.633/Mds/2014. :- 6 -: 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).
On appeal, the Commissioner of Income Tax (Appeals) observed that generation of electricity was consequent on the I.T.A.No.633/Mds/2014. :- 7 -: 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 I.T.A.No.633/Mds/2014. :- 8 -: 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.
I.T.A.No.633/Mds/2014. :- 9 -:
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 I.T.A.No.633/Mds/2014. :- 10 -: 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 I.T.A.No.633/Mds/2014. :- 11 -:
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 …………………………….
I.T.A.No.633/Mds/2014. :- 12 -:
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.
I.T.A.No.633/Mds/2014. :- 13 -:
We have heard both the parties and perused the material on 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 I.T.A.No.633/Mds/2014. :- 14 -:
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 I.T.A.No.633/Mds/2014. :- 15 -: 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.
Now, we proceed to examine the provision of section 80-IA of 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 I.T.A.No.633/Mds/2014. :- 16 -: 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; I.T.A.No.633/Mds/2014. :- 17 -:
(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.
The primary purpose of u/s. 80-IA is to grant relief to a new 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.
Where an assessee makes a claim for relief u/s. 80-IA the 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 I.T.A.No.633/Mds/2014. :- 18 -: 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.
In our opinion the splitting of or reconstruction of the existing 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.
Further, where the new unit was started by fresh outlay of 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.
In other words, the establishment of a new industrial unit as a 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 I.T.A.No.633/Mds/2014. :- 19 -: unit, capable of production of goods then it can be classified as a newly established industrial undertaking.
The new industrial unit brought into existence by establishing 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.
After considering the facts of the case and the legal position 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.
I.T.A.No.633/Mds/2014. :- 20 -:
(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 I.T.A.No.633/Mds/2014. :- 21 -: 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.
Even though the decision of Textile Machinery Corporation Ltd [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 I.T.A.No.633/Mds/2014. :- 22 -: 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.
I.T.A.No.633/Mds/2014. :- 23 -:
The second ground in this appeal is with regard to 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.
The last ground in this appeal is with regard to levy of 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.
In the result, the appeal of the assessee in is partly allowed. Order pronounced on Friday, the 24th day of July, 2015, at Chennai.