The DCIT, Circle-4(1)(2), Ahmedabad V. Vishal Fabrics Pvt. Ltd., Ahmedabad

ITA 125/AHD/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 6227 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 12-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K SINGH
• Keywords: Business income; Depreciation; Business expenditure; Rule of consistency; Initiation of penalty proceedings; Revised return

Judgement Text

, M MM MH HH H IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER !# I.T.A. NO.125/AHD/2015 ( / ASSESSMENT YEAR : 2011-12) DCIT, CIRCLE 4(1)(2), AHMEDABAD. # VS. VISHAL FABRICS PVT. LTD. B/H. KASHIRAM MILL COMPOUND, RANIPUR, NAROL, AHMEDABAD. $ # % & # PAN/GIR NO. : AAACV 6304 R ( !$' / APPELLANT ) .. ( ($' # RESPONDENT ) !$') # APPELLANT BY : SHRI V. K. SINGH, SR. D.R ($' *) / RESPONDENT BY : SHRI GAURAV NAHTA, A.R. + ,*-. / DATE OF HEARING 12/01/2018 /012*-. / DATE OF PRONOUNCEMENT 24/01/2018 3# O R D E R PER MAHAVIR PRASAD, JUDICIAL MEMBER : THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-XIV, AHMEDABAD , VIDE APPEAL NO.CIT(A)-XIV/DCIT(OSD)/476/2013-14 DATED 10/10/201 4 FOR ASSESSMENT YEAR (A.Y.) 2011-12, ON THE FOLLOWING GR OUNDS: 1). WHETHER THE COMMISSIONER OF INCOME-TAX (APPEAL S)-XIV, AHMEDABAD IS RIGHT IN LAW AND ON FACTS IN DIRECTING TO ALLOW THE CLAIM OF DEDUCTION U/S.80IA OF THE ACT OF RS.2,70,6 9,861/- DESPITE THE FACT THAT ASSESSEE ARBITRARILY DECIDED THE SELL ING PRICE OF ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 2 - STEAM AT 25% MORE WHILE TRANSFERRING THE STEAM FROM ELIGIBLE UNIT TO NON-ELIGIBLE UNIT, AND THE A.O. WAS WELL WI THIN HIS POWERS TO FIX THE RATE U/S.80IA(8) OF THE ACT'. 2). 'THE ORDER OF THE CIT(A) MAY BE SET ASIDE TO EX AMINE THE SELLING PRICE AS PER SECTION 80IA(8) AND PROVISO PLACED THE RE UNDER.' 3). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER . 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERI ALS ON RECORD ARE AS UNDER:- IN THIS CASE, THE RETURN OF INCOME WAS FILED ON 24. 09.2011 DECLARING TOTAL INCOME OF 'NIL'. THE ASSESSEE FILED REVISED RETURN OF INCOME ON 29.03.2013 DECLARING TOTAL INCOME OF 'NIL '. THE RETURN WAS REVISED DUE TO CHANGE IN DEPRECIATION RATE IN RESPE CT OF POWER PLANT ASSETS. THE CHANGE IN DEPRECIATION RATE WAS RETROSP ECTIVELY FROM A.Y.2004-05 AS PER THE ORDER OF THE DEPARTMENT.' 2.1 THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PROCESSING, MANUFACTURING AND TRADING OF CLOTHS. THE A.O. OBSER VED THAT: (I) DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED THAT THE ASSESSEE WAS HAVING CAPTIVE POWER PLANT ON WHICH THE ASSESSEE WAS CLAIMING DEDUCTION U/S. 80IA OF THE ACT. DURING THE YEAR RELEVANT TO A.Y. 2011-12 THE ASSESSES HAD CLAIMED DEDUCTION OF RS.4,60,84,940/- U/S.80IA IN RESPECT OF THE CAPTIVE POWER PLANT ESTA BLISHED BY IT. FROM THE DETAILS OF PROFITS GENERATED FROM CAPTIVE POWER PLANT DIVISION IT WAS SEEN THAT OUT OF THE TOTAL SALES OF RS.17,99,45 ,758/- MADE BY CAPTIVE POWER PLANT TO PROCESS DIVISION OF THE ASSE SSEE RS. 4,45,96,449/- WAS IN RESPECT OF SALE OF POWER AND R S.13,53,49,309/- WAS ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 3 - IN RESPECT OF SALE OF STEAM. IT WAS FURTHER SEEN FR OM THE DETAILS SUBMITTED BY THE ASSESSES THAT DURING THE YEAR TOTA L STEAM GENERATED BY CAPTIVE POWER PLANT WAS 157762938 KG. OUT OF WHICH 117695051 KG. I.E. NEARLY 71 % WAS TRANSFERRED TO THE PROCESS DIV ISION. THUS, IT WAS EVIDENT THAT THE CAPTIVE POWER PLANT WAS SO DESIGNE D SO AS TO PRODUCE STEAM IN SUBSTANTIAL QUANTITY FOR THE BENEFIT OF TH E ANCILLARY OBJECT OF THE COMPANY FOR PROCESSING ITS MAIN PRODUCT TEXTILES. T HE HIGH PRESSURE STEAM WAS GENERATED FOR PRODUCING ELECTRICITY AND L OW PRESSURE STEAM WAS GENERATED FOR CONSUMPTION AS RAW MATERIAL FOR T EXTILE PROCESSING. THUS, MAJORITY OF STEAM (71%) GENERATED IN CAPTIVE POWER PLANT WAS UTILIZED IN THE OVERALL OPERATION OF THE ASSESSEE W ITH RESPECT TO THE TEXTILE PROCESSING RATHER THAN GENERATION OF ELECTR ICITY. IT HAS ALSO BEEN MENTIONED IN THE COMPUTATION GIVEN BY THE ASSESSES THAT THE COST OF GENERATION OF STEAM IS RS.0.92/- PER KG. OF STEAM W HEREAS THE SALE PRICE OF STEAM HAS BEEN TAKEN TO BE RS. I.15/- PER KG. OF STEAM THEREBY DERIVING PROFIT OF RS. 2,70,69,861/- (RS. 0.23 X 11 ,76,95,051) FROM SALE OF STEAM WHICH IS 78.9% OF TOTAL PROFIT DERIVED FRO M CAPTIVE POWER PLANT. (II) 'IT IS AN ACCEPTED FACT THAT STEAM IS NOT A CO MMERCIAL COMMODITY AND IS NOT BROUGHT TO MARKET FOR SALE AND PURCHASE. IT IS NOT CAPABLE BEING TRANSPORTED TO A DISTANT PLACE BECAUSE IT COU LD LOSE ITS POTENTIAL HEAT. MOREOVER, BECAUSE OF HUGE REQUIREMENT OF COMP RESSOR POWER FOR TRANSPORTATION AND CAPITAL COST OF EQUIPMENT LIKE C OMPRESSOR, PIPING ETC IT IS UNECONOMICAL TO TRANSPORT IT TO A NEARBY LOCA TION AS THE STEAM IS OF LOW PRESSURE & DENSITY, THUS, IT IS CLEAR THAT STEA M IS NOT MARKETABLE COMMODITY AND THUS DOES NOT HAVE ANY MARKET VALUE. GUJARAT STATE ELECTRICITY REGULATORY COMMISSION (GERC) IS REGULAT ORY COMMISSION IN RESPECT OF ELECTRICITY GENERATED IN GUJARAT. THE TA RIFF FOR GENERATION AND DISTRIBUTION OF POWER IN GUJARAT IS DECIDED BY GERC . IT WAS INFORMED BY GERC THAT SINCE STEAM IS NOT A TRADABLE COMMODIT Y IT CANNOT BE PURCHASED AND HENCE THE MARKET PRICE CANNOT BE DETE RMINED. IN A THERMAL POWER PLANT THE PRIME MOVER IS STEAM D RIVEN. WATER IS HEATED, TURNS INTO STEAM AND SPINS A TURBINE, WH ICH DRIVES AN ELECTRICAL GENERATOR. AFTER IT PASSES THROUGH THE T URBINE THE STEAM IS CONDENSED IN A CONDENSER AND IS RECYCLED TO WHERE I T IS HEATED. IN THIS CASE, THE STEAM LEAVING THE TURBINE AT LOW PRESSURE WAS FED INTO STEAM ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 4 - PIPES FOR DISTRIBUTION IN PROCESS HOUSE WHERE IT IS ONE OF THE INPUTS IN MANUFACTURING PROCESS. THUS, THE STEAM WHICH COULD HAVE BEEN RE- CIRCULATED AND USED FOR GENERATION OF ELECTRICITY W AS BEING SENT TO PROCESS HOUSE AND NOT RE-CIRCULATED. THE PRICE AT W HICH STEAM WAS BEING SOLD WAS ARBITRARILY DECIDED BY THE ASSESSEE. ' (III) 'SINCE THE ASSESSEE CANNOT PURCHASE STEAM FRO M OUTSIDE AND STEAM IS ONE OF THE RAW MATERIAL FOR TEXTILE PROCES S HOUSE THE ASSESSEE PURCHASE COAL/LIGNITE FROM WHICH STEAM IS GENERATED AND IS USED IN PROCESS HOUSE. SIMILARLY IN THE CASE OF CAPTIVE POW ER PLANT ALSO COAL/LIGNITE WAS BOUGHT AND WAS USED FOR PRODUCTION OF STEAM WHICH WAS BEING SENT TO PROCESS HOUSE. SINCE THE STEAM CA NNOT BE PURCHASED FROM OUTSIDE MARKET IF THE ASSESSEE HAS TO USE STEA M HE HAS TO GENERATE IT THUS MARKET RATE OF STEAM FOR THE PURPOSE OF CAL CULATING DEDUCTION U/S.80IA OF THE ACT HAS, TO BE TAKEN AS COST OF PRO DUCTION OF STEAM BY THE CAPTIVE POWER PLANT. SINCE THE COST OF PRODUCTION OF STEAM BY CAPTIVE PO WER PLANT IS RS. 0.92/- PER KG. OF STEAM THE SALE PRICE HAS TO B E TAKEN AS RS. 0.92/- PER KG. OF STEAM ONLY BECAUSE THE ASSESSEE CANNOT D ERIVE ANY PROFITS FROM SALE OF COMMODITY WHICH IS NOT AVAILABLE IN MA RKET. ACCORDINGLY, THE ASSESSEE WAS GIVEN DETAILED SHOW-C AUSE VIDE LETTER DATED 10.02.2014 ASKING THE ASSESSEE TO SHOW -CAUSE AS TO WHY THE SALE PRICE OF STEAM BE NOT TAKEN AS RS.0.92/- PER K G. OF STEAM.' (IV) 'IN RESPONSE TO THE SHOWCAUSE THE ASSESSEE SU BMITTED ITS REPLY VIDE LETTER DATED 20.02.2014. IN HIS REPLY THE ASSE SSEE STATED THAT- 'WITH REFERENCE TO YOUR SHOW CAUSE NOTICE DATED 10. 02.2014 RECEIVED ON 12.02.2014 WE HAVE TO STATE AND SUBMIT AS PER FO LLOWING PARAGRAPH:- 1. STEAM IS THE ESSENTIAL AND MOST VITAL FOR TEXTILE P ROCESSING UNIT. STEAM IS USED IN DIFFERENT TYPE OF THE PROCESSES I. E. DESIZING, WASHING IN BOILING WATER, SCOURING, BLEACHING, MERC ERIZING, DRYING, PRINTING AND DYING, STEAMING OF PRINTED FAB RIC FOR COLOUR FIXATION, WASHING/SOAPING OF DYED/PRINTED FABRIC, F INISHING AND SANFORIZING/DECADISING I.E. REQUIRES STEAM TO CARRY OUT ALL ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 5 - PROCESS/OPERATION AND THE WITHOUT STEAM ASSESSEE CO ULD NOT PRODUCE THE QUALITY FABRICS/CLOTH. THE COMPANY HAS GENERATING STEAM FROM LOW PRESSURE STEAM BOILER FOR PROCESSING OF FABRIC AT DIFFERENT STAGES OF PRO DUCTION BEFORE COMMERCIAL PRODUCTION OF CAPTIVE POWER PLANT. THE P RODUCTION COST OF STEAM FROM LOW PRESSURE STEAM BOILER RANGIN G BETWEEN RS. 7.76 TO RS. 1.24 PER KG. THE ENGINEER CERTIFIED IS ALSO IS ATTACH HEREWITH. THE POWER PLANT DIVISION HAS BILLED STEAM AT THE RATE OF RS. 1.15 PER KG. TO PROCESS DIVISION WHICH IS LOWER THAN THE LOW PRESSURE STEAM BOILER COST OF STEAM FOR PROCESS DIV ISION. 2. THE COMPANY IS RUNNING AN EXTRACTION CUNT CONDE NSING TURBINE AND ITS FOR CAPTIVE PURPOSE TO MEET THE HEATING AND POWER REQUIREMENTS OF THE FABRICS/CLOTHES PROCESS DIVISIO N OF THE COMPANY. THE FUNCTION OF THE POWER PLANT IS THAT OF EXTRACTION STEAM AND POWER ON TURBINE ARE INVERSELY PROPORTION AL AND BALANCES REQUIREMENT OF END USER. THE KIND OF EXTRACTION CONDENSING IS A COMMON OPTIO N FOR THE TEXTILE PROCESS HOUSES DUE TO ITS FLEXIBILITY IN OP ERATION BETWEEN STEAM AND POWER DEMANDS. AS AN ENGINEERING PRINCIPL E, WHEN EXTRACTION STEAM DEMAND IS HIGHER FOR PROCESS OPERA TIONS, THE CONDENSATE AND OUTPUT ON THE TURBINE WOULD REDUCE A ND IF THE PROCESS DEMAND IS CORRESPONDINGLY THE CONDENSATE AN D POWER OUTPUT ON TURBINE WOULD INCREASE. FROM THE ABOVE SUBMISSION IT IS CLEAR THAT THE INPU T STEAM QUANTITY AND SUM OF OUTGOING STEAM QUANTITY AND CONDENSATE I S SAME. HENCE THE EXTRACTION STEAM IS NOT A BYPRODUCT FROM TURBINE. THE CONTENTION OF YOUR HONOUR THAT STEAM IS BYPRODUCT O F THE POWER GENERATOR IS NOT CORRECT. IT IS BEING OPERATED ACCO RDING TO THE NECESSITY AND NEED OF THE TEXTILE PROCESSING REQUIR EMENT, FROM THE ABOVE SUBMISSION IT IS CLEAR MINT STEAM IS ORIGINATE AS MAIN PRODUCT AND NOT THE BYPRODUCT OF POWER GENERAT OR AND IT IS MAIN PRODUCT AND ITS VALUE TO BE FULLY RECOVERABLE FROM THE USER. FURTHER, AS POINTED OUT IN YOUR SHOW CAUSE NOTICE T HAT BY PRODUCT HAS NIL RECOVERABLE VALUE IS ALSO NOT CONVINCING NO T CORRECT I.E. THE STEAM HAS GOT ECONOMICAL COMMERCIAL VALUE AND CAPAB LE OF VALUE ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 6 - ADDING TO THE FABRIC VALUE I.E. YOUR CONTENTION IS , NOT SUSTAINABLE ON FACTS AND LAW AND ALSO ON COMMERCIAL CONSIDERATI ON. 3. YOUR HONOUR HAS NOT JUSTIFYING THE PROVISIONS O F SECTION 80IA OF THE INCOME TAX ACT, 1961 BY DIFFERENTIATING BETW EEN ELECTRICITY AND STEAM. TO QUALIFY FOR TAX HOLIDAY U/S. 80IA(4)( IV) GENERATION OF POWER IS MOST CRITICAL CONDITION OF THE SECTION. TH E POWER CAN BE OF ANY FORM I.E. ELECTRICAL, WIND, THERMAL, SOLAR, BIO ENERGY, STEM ALL ARE CONSIDERED AS ENERGY AN ENERGY CONSIDERED A S POWER. (REF SIAL SBEC BIOENERGY LTD V. CIT 2004 83 TTJ 866) THE APEX COURT IN THE CASES REPORTED IN 1991 VOL II (SC)(1) AND 19 97 (6) SCC 420, REFERRED TO THE DEFINITION OF THE WORD STEAM UNDER THE FACTORIES AND MUNICIPAL CORPORATION ACTS, WHERE STEAM WAS HEL D TO BE FORM OF POWER. SIMILAR FINDINGS WAS GIVEN BY KERALA HIGH COURT IN THE CASES REPORTED IN 47 STC 68 AND THAT IN AIR 1962 SC 29. FURTHER AS PER MANY DICTIONARY DEFINITIONS STEAM IS DEFINED AS ENERGY OR POWER OR NAY FORM OF ENERGY OR FORCE AVAILABLE FOR APPLICATION TO WORK (AS HINT OF GRAVITATION, RUNNING WATER, WIND, STEAM, ELECTRICITY). THUS THE STEAM IS A POWER PRODUCT CON SIDER AS ENERGY/ELECTRICITY. IN SIAL SBEC BIOENERGY, TRIBUNAL AGREED WITH THE AR GUMENT OF THE ASSESSEE THAT THE IDEA OF NOT MENTIONING THE WORD E LECTRICITY IN SECTION 80IA(4)(IV) WAS ONLY FOR THE PURPOSE THAT T HE LEGISLATURE WANTED TO GIVE THE WORD POWER A WINDER MEANING. FUR THER EVEN IN CASE OF FACTORIES WHICH USES COGENERATION PLANTS, W HERE LOW PRESSURE STEAM IS USED, THEY COULD WORK OUT THE PRO FIT FROM SUCH AN UNDERTAKING AND CLAIM IT EXEMPT UNDER SECTION 80IA( 4)(IV)OF THE ACT. FURTHER AS PER SBEC BIOENERGY, TRIBUNAL OBSERVED TH AT BOTH OF THEM (COMPARING STEAM WITH THAT OF ELECTRICITY) ARE CAPABLE PRODUCING SAME RESULTS. IN THE CASE OF THE ASSESSEE , A TEXTILE PROCESS HOUSE INSTEAD OF USING THE ELECTRIC ENERGY, USED THERMAL STEAM ENERGY DUE TO ITS PECULIAR NATURE OF INDUSTRY AND REQUIREMENT. HENCE IT IS EVIDENT FROM THE ABOVE SUBMISSION THAT THE STEAM IS POWER AND QUALIFY FOR THE EXEMPTION U/S.80IA(4)(IV) . THE PRESUMPTION OF YOUR HONOUR 'STEAM IS MERELY A BY PR ODUCT OF ELECTRICITY GENERATION AND COST OF STEAM GENERATION PER UNIT TO BE ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 7 - TAKEN AS SALE PRICE THEREBY DERIVING NIL PROFIT FRO M SALE OF STEAM TO THE PROCESS HOUSE' IS BAD IN LAW AND ALSO ON FAC TS I.E. ILLEGAL AND UNSUSTAINABLE. 4. THE COMPANY'S CAPTIVE POWER PLANT HAS BEEN APPR OVED BY THE GEB BY VIDE LETTER DATED 01.03.2004 AND SALE OF POW ER IS RESTRICTED TO OUTSIDE PARTIES. AS PER POLICY ONLY G EB OR OTHER GOVERNMENT AUTHORIZED COMPANY OR BODY CAN SELL THE POWER TO THE CONSUMER. FURTHER AS PER COMMON ACCEPTED PRACTICE A ND UNDERSTANDING ANY PRODUCT OR SERVICES NOT SUPPORTED BY THE PROPER INFRASTRUCTURE ARE NON TRADABLE. IN THE CASE OF FIX ASSESSEE THE STEAM POWER IS BEING TRANSMITTED THROUGH THE PROPER INFRASTRUCTURE OF PIPELINES TO PROCESS DIVISION. ASSESSEE CAN ALSO SOLD TO OTHER UNDERTAKINGS IF IT HAS SURPLUS POWER/STEAM GENERATI ON THROUGH SETTING UP OF PROPER INFRASTRUCTURE. FURTHER AS PER SECTION 80IA(I) IS THE DERIVING OF THE PROFIT OR GAIN FROM THE ACTI VITY TO CLAIM THE EXEMPTION ON PROFIT EARNED FURTHER IN THE ASSESSEE CASE POWER IS NOT TRADABLE IN OPEN MARKET DUE TO RESTRICTIONS OR BAN IS PUT BY THE GOVERNMENT OVER ITS TRADING HENCE MERELY NON TRADIN G OF SUCH PRODUCT OR SERVICE IS NOT THE GROUND FOR DENIAL OF THE EXEMPTION. AS PER THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT, MADURAI VS. THIAGARAJAR MILLS LTD. KAPPALUR (TAX AP PEAL NO. 68 TO 70/2010 DT. 07.06.2010) HAS HELD AS FOLLOWS:- 'IN SECTION 80IA(I) ALSO NO RESTRICTION HAS BEEN IM POSED AS REGARDS THE DERIVING OF PROFIT OR GAIN IN ORDER TO STATE TH AT SUCH PROFIT OR GAIN DERIVED ONLY THROUGH AN OUTSIDE SOURCE ALONE W OULD MAKE ELIGIBLE FOR THE BENEFITS PROVIDED IN THE SAID SECT ION. THEREFORE, IT IS TRUE AND CORRECT LAW AND ALSO THE INTENTION OF LEGISLATURE, IN HOLDING THAT CAPTIVE CONSUMPTION OF THE POWER GENERATED BY THE ASSESSEE FROM ITS OWN POWER PLANT WOULD ENABLE THE RESPONDENT/ASSESSEE TO DERIVE PROFIT AND GAINS BY WORKING OUT THE COST OF SUCH CONSUMPTION OF POWER IN AS MUCH AS THE ASSESSEE IS ABLE TO SAVE LO THE EXTENT WHICH WOULD CERTAINLY BE COVERED BY S.80IA(1). WHEN SUCH WILL BE THE OUT COME OUT OF OW N CONSUMPTION OF THE POWER GENERATED, AND GAINED BY THE ASSESSEE BY SETTING UP ITS OWN POWER PLANT, WE DO NOT FIND ANY LACK OF MER IT IN THE CLAIM OF THE RESPONDENT/ASSESSEE WHEN IT CLAIMED BY RELYI NG UPON S.80IA(1) OF THE INCOME TAX ACT BY WAY OF DEDUCTION OF THE VALUE ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 8 - OF SUCH UNITS OF POWER CONSUMED BY ITS OWN PLANT BY WAY OF PROFIT AND GAINS FOR THE RELEVANT ASSESSMENT YEARS.' THERE ARE TWO OPTIONS WOULD HAVE BEEN AVAILABLE TO THE ASSESSEE IN THE COMPUTATION OF THE INCOME ARISING OUT OF THE ST EAM GENERATION. THESE WOULD BE EITHER BY HIKING THE PRICE IN THE OP EN MARKET IF THE PRODUCT WAS SALEABLE OR WAS ACTUALLY SOLD OR IN THE ALTERNATIVE BY CONSIDERING THE SAVINGS IN THE COST OF THE ALTERNAT IVE USE MADE OF THE PRODUCT. IN THE CASE OF THE STEAM GENERATED, THE POSSIBILITY OF THE SALE OF THE STEAM IN OPEN MARKET IS RULED OUT DUE TO RESTRICTIO N ON SALE IN OPEN MARKET. SINCE THE CONSUMPTION IN DIFFERENT PROCESS OF THE TEXTILE UNIT WOULD HAVE INCREASED THE COST OF FUEL/RAW MATE RIAL IN THE OPERATIONS AND SINCE THE GENERATION OF STEAM IN THE COGENERATION OF POWER AND STEAM IN THE CAPTIVE POWER UNIT RESULT ED IN SAVINGS, THE ASSESSEE CONSIDERED THAT TO BE ITS INCOME IN TH E PROFIT AND LOSS ACCOUNT OF THE CPP. (REF: HPCL V. DCI T, BOMBAY HIGH COURT PETITION NO. 2513/2009) IN THE CASE OF ASSESSEE, AS PER PARA 1 THE COMPANY HAS VALUED THE HIGH PRESSURE STEAM AT, THE LESS THAN THE COST OF T HE COMPANY TO PRODUCE LOW PRESSURE STEAM FROM BOILER. STEAM TRANSFER TO PROCESS (A) TOTAL SALE VALUE AT RS.1.15 PER KG. (B) TOTAL COST OF PROCESS DIVISION TO GENERATE SAME QUANTITY OF STEAM AT RS.1.20 (MEAN OF RS.1.16 TO RS 1.24) PER KG(C) 117695051 KG RS. 13,53,49,309/- RS.14,12,34,061/- IT IS EVIDENT FROM THE ABOVE THAT THE COMPANY HAS V ALUED THE SALE OF POWER STEAM TO PROCESS DIVISION IS BELOW THE COST O F THE PROCESS DIVISION. CONSIDERING THE ABOVE IF THE COMPANY HAD NOT INSTAL LED THE CPP THE COMPANY COULD HAVE INCURRED THE COST OF RS.14.12 CR . FOR MANUFACTURING OF TEXTILES. 5. THE BASIS IDEA OF INTRODUCTION OF SECTION 80IA(I V) IS TO PROMOTE THE POWER GENERATING UNITS FOR EMPOWERMENT OF NATIO NAL POWER POLICY ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 9 - OF GOVERNMENT. HENCE FOR CLAIMING EXEMPTION UNDER S ECTION THERE HAS TO BE PROFIT OR GAIN FROM THE GENERATION OF ANY FOR M OF POWER WHICH BEING USED IN CAPTIVE CONSUMPTION OR SOLD OUTSIDE I S NOT INTENTION OF THE LEGISLATURE. AMI THERE IS NO INTENTION FROM THE LEGISLATURE THAT GAIN ON OUT SIDE SALE ONLY WILL BE ENTITLED LO CLAIM EXE MPTION. THE COMPANY HAS DERIVED THE PROFIT FRONT SALE OF STEAM POWER BY SELLING AT RS. 1.15 KG. TO PROCESS DIVISION OF THE COMPANY I.E. INTER D IVISION TRANSACTION. THE COMPANY HAS MAINTAINED THE SEPARATED SETS OF BO OKS OF ACCOUNT FOR CALCULATION OF COST AND PROFIT/LOSS FROM THE AC TIVITY WHICH IS QUALIFY U/S. 80IA(IV) OF THE ACT. AS THE STEAM GENERATED BY THE POWER UNIT IS NOT TRADABLE IN THE STATE, THAT DOES NOT MEAN THAT COMPANY CANNOT EARN THE REASONABLE PROFITS FROM THE ACTIVITY BY FOLLOWI NG COST PLUS METHOD AND THE COMPANY HAS ADDED MARGIN OF 25% TO COST OF STEAM POWER OF RS. 0.92/- PER UNIT AND SALE AT RS. 1.15 PER KG. TO PROCESS DIVISION. THE SELLING PRICE PER UNIT OF STEAM IS RS. 1.15 IS REAS ONABLE MID JUSTIFIABLE ON THE FOLLOWING GROUNDS. IN THE CASE, OF M/S. KHAITAN CHEMICALS AND FERTIL IZERS LTD COURT HAS ALLOWED THE CLAIM U/S.80IA WHERE THE COMP ANY HAS PRODUCE STEAM IN THE CAPTIVE POWER PLANT LOCATED IN THE STALE OF MP AND TRANSFER THE STEAM AT THE RATE OF RS. 1.70/- PER KG TO ITS FERTILIZER UNIT WHERE AS IN THE ASSESSEE CASE STEAM IS TRANSFER AT THE RATE OF RS. 1.15 PER UNIT ONLY. TORRENT POWER LTD, A BIGGEST POWER GENERATOR COMPANY IN THE AHMEDABAD REGION HAS POSTED PBT MARGIN OF 21.86% IN THE A.Y. 2011-12 WHICH HAS HUGE DISTRIBUTION NETWORK IN THE CITY. WHILE COMPARING THE MARGIN OF 25% OF STEAM TRANSFER LO POWER PLANT OF PROCESS DIVISION. FURTHER SELLING PRICE OF RS.1.15/- PER KG IN CLUDES THE NORMAL LOSS INCURRED DUE TO CONDENSATION AND INSULATED LEA KAGE WHICH IS ESTIMATED IN THE RANGE OF 3% TO 5% OF STEAM TRAN SFER TO POWER PLANT TO PROCESS DIVISION. YOUR HONOUR HAS TO CONSIDER THE REPLACEMENT COST OF CPP FOR A.Y. 2010-11 CONSIDERING THE INFLATION AND FOREIGN EXCHANGE FLUCTUATION. IT IS VERY MUCH CLEAR AND SPECIFIC THAT THE S TEAM IS FORM OF POWER AND CLEARLY AS PER THE JUDGMENT OF SIAL SBEE STEAM AND ELECTRICITY CAPABLE OF PRODUCE SAME RESULT, HENCE I F WE COMPARE THE SELLING PRICE OF STEAM OF RS.1.15/- PER KG WITH COST OF ELECTRICITY THE COMPANY HAS PAID TO TORRENT POWER/GEB DARING THE A.Y. 2011-12 IS AT RS. 5.5 PER UNIT. AS PER THE ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 10 - ACCEPTED ENGINEERING STANDARDS 4.7 KG OF STEAM IS E QUAL TO ONE UNIT OF POWER. STEAM TRANSFER TO PROCESS TOTAL SALE VALUE AT RS.1.15 PER KG. CONVERSION AT 4.7 KG=1UNIT OF POWER TOTAL SALE PRINCE AT RS.5.5 PER UNITS 117695051 RS.13,53,49,309/- 25041500 UNITS RS.13,77 ,28,251/- AS PER ABOVE WORKING TOTAL RECORDED SATES VALUE IS OF RS. 13.53 CR IS LOWER THAN COMPANIES PURCHASED POWER FROM GEB/TORRENT AT RS. 13.77 CR. HENCE, SALE PRICE IS R EASONABLE, JUSTIFIABLE AND ACCEPTABLE. FURTHER AS PER SECTION 80IA(8) 'THE PROFIT AND GAIN S OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANS FER, IN EITHER CASE, HAD BEEN MADE AT THE MARKET VALUE OF SUCH GOO DS OR SERVICES AS ON THAT DATE.' IT IS VERY CLEAR FROM THE PROVISIONS THAT THE PROFI T TO BE DERIVED US PER MARKET VALUE AND NOT AT COST AS EMPHASIZED B Y YOUR HONOUR IN SHOW CAUSE NOTICE. WITH THE ABOVE SUBMISSION WE REQUEST YOUR HONOUR TH E SALE PRICE OF STEAM BE ACCEPTED AT RS.1.15 PER KG WHICH IS FAIR, REASONABLE, APPROPRIATE AND JUSTIFIABLE. YOUR ASSES SEE HAS CHARGED SALE OF POWER TO PROCESS DIVISION AT PRICE OF RS. 4.05 PER UNIT AGAINST THE COST OF RS. 5.5 PER UNIT (LAND ING COST OF POWER TO THE COMPANY) WHICH IS 26.36% LOWER THAN TH E COST OF POWER AT WHICH GEB/TORRENT SUPPLY/ TO THE COMPANY. THE COMPANY HAS FOLLOWED THE PRINCIPLES OF THE EQUITY, JUSTICE AND REASONABLENESS WHILE FIXING THE PRICES OF SALE OF P OWER IN INTER UNIT SALES, (REF: HPCL R. DCIT - BOMBAY HIGH COURT WHERE AS PER THE FACTS OF THE CASE AO HAS ALLOWED THE VALUAT ION OF POWER AT THE RATE AT WHICH UNIT IS PURCHASING IT FROM THE APEB) THE STEAM IS NON TRADABLE COMMODITY BECAUSE OF THE RESTRICTION OF SALE BY GOVERNMENT CONSIDERING THE SAME., COMPAN Y HAS NOT SALE THE STEAM TO PROCESS DIVISION AT HIGHER THAN R S. 1.15 PER KG AS THE HISTORICAL COST OF LOW PRESSURE STEAM FRO M THE BOILER IS IN RANGE OF RS. 1.16 TO RS. 1.24 PER KG. HENCE O N GROUND OF REASONABLENESS AND APPROPRIATENESS THE POWER PLANT HAS SOLD ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 11 - STEAM AT DISCOUNTED PRICE AS COMPARED TO LOW PRESSU RE STEAM BOILER COST. THE COMPANY HAS SET UP THE CAPTIVE POWER PLANT ONLY ON THE BASIS OF SAVING IN POWER CONSUMPTION EXPENSES AND I F OTHEWISE CPP IS NOT SET UP THEN SAME COST OF ELEMENT IS ELIG IBLE FOR DEDUCTION AS BUSINESS EXPENSES.' (V) THE A.O. REJECTED ASSESSEE'S EXPLANATION OBSERVED 'I). THE ASSESSEE HAS STATED THAT THE COMPANY W AS GENERATING STEAM FROM LOW PRESSURE STEAM BOILER FOR PROCESSING OF FABRIC AT DIFFERENT STAGES OF PRODUCTION BEFORE COM MERCIAL PRODUCTION OF CAPTIVE POWER PLANT. THE PRODUCTION C OST OF STEAM FROM LOW PRESSURE STEAM BOILER IS RANGING BETWEEN RS. 1.16/- TO RS. 1.24/- PER KG. THE ASSESS EE HAS FURTHER FURNISHED ON ENGINEER CERTIFICATE. THE ASSE SSEE FURTHER STATED THAT THE POWER PLANT DIVISION HAS BI LLED STEAM AT RATE OF RS. 1.15/- PER KG. TO PROCESS DIVI SION WHICH IS LOWER THAN THE LOW PRESSURE STEAM BOILER C OST OF STEAM FOR PROCESS DIVISION. THIS CONTENTION OF THE ASSESSEE IS ABSOLUTELY UNACC EPTABLE, IRRATIONAL AND WITHOUT ANY EVIDENCE. AS PER ASSESSE E'S OWN SUBMISSION VIDE LETTER DATED 28.10.2013 THE ASSESSE E HAS SUBMITTED DETAILS OF PRODUCTION OF STEAM BY CAPTIVE POWER PLANT WHICH IS REPRODUCED BELOW:- TOTAL STEAM GENERATED BY POWER PLANT 157762938/ KG. TOTAL EXPENSES INCURRED LIGNITE & COAL RS. 11,72,02,086/- MAINTENANCE EXPENSES RS. 1,35,69,303/- SALARIES & WAGES KS. 33,71,517/- INTEREST RS. 3,61,661/- DEPRECIATION RS. 1,11,49,377/- ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 12 - TOTAL RS. 14,56,53,944/- 145653944 COST OF STEAM GENERATED = RS. -------------- 157762938 = RS. 0.92/KG. THUS, AS PER ASSESSEE'S OWN ADMISSION THE COST OF G ENERATION OF STEAM IS RS. 0.92/KG. THE SAID COST HAS BEEN ARRIVE D AT AFTER ALLOCATING MAINTENANCE EXPENSES OF THE BOILER AND T HE DEPRECIATION OF THE BOILER ALSO. THUS, THE COST OF GENERATION OF STEAM IS RS. 0.92/KG. OF STEAM. EVEN IF THE CAPTIVE POWER PLANT WAS NOT THERE THE STEAM WAS TO BE GENERATED AND WAS TO BE USED BY THE PROCESS DIVISION AS STEAM IS ONE OF THE INPU TS IN TEXTILE PROCESSING AND THE COST OF GENERATION OF STEAM WOUL D BE SAME I.E. RS. 0.92/KG. THE CAPTIVE POWER PLANT HAS IN NO WAY HELPED IN REDUCING THE COST OF GENERATION OF STEAM. THE AS SESSEE'S CONTENTION THAT THE PRODUCTION COST OF STEAM FROM L OW PRESSURE STEAM BOILER IS RANGING BETWEEN RS. 1.16 TO RS. RS. 1.24 PER KG. IS NOT AT ALL ACCEPTABLE IN VIEW OF THE FACT THAT T HE ONLY THINGS REQUIRED FOR GENERATION OF STEAM ARE FUEL & BOILER. THE COST OF GENERATION OF STEAM HAS BEEN WORKED OUT BY CAPTIVE POWER PLANT DIVISION (AS PER YOUR OWN ADMISSION) HAS BEEN ARRIVED AT AFTER TAKING INTO ACCOUNT FUEL, MAINTENANCE & DEPRE CIATION OF BOILER. THUS, IT IS ESTABLISHED BEYOND DOUBT THAT C OST OF PRODUCTION OF STEAM IS RS. 0.92 PER KG. II) THE ASSESSEE HAS CONTENDED THAT STEAM IS ENERGY AND ENERGY HAS TO BE CONSIDERED AS POWER AND IS THUS ELIGIBLE FOR DEDUCTION U/S. 80IA(4) OF THE ACT. THIS CONTENTION OF THE ASSESSEE HAS ALREADY BEEN ACCEPTED AND THE STEAM HAS ALREADY BEEN HELD T O BE POWER WITHIN THE MEANING OF SEC. 80IA(4) OF THE ACT. III) THE ASSESSEE HAS FURTHER CONTENDED THAT ITS CA PTIVE POWER PLANT HAS BEEN APPROVED BY GEB VIDE LETTER DATED 01.03.20 04 AND SALE OF POWER WAS RESTRICTED TO OUTSIDE PARTIES. AS PER POLICY ONLY ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 13 - GEB OR OTHER GOVERNMENT AUTHORIZED COMPANY OR BODY CAN SELL THE POWER TO THE CONSUMER.' THIS CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE I N VIEW OF THE FACT THAT SALE OF POWER IS NOT BANNED BY GEB BU T IF THE ASSESSEE WANTS TO SELL POWER TO THIRD PARTY IT HAS TO SEEK PERMISSION FROM GEB TO DETERMINE THAT PRICE ALSO. T HE ASSESSEE HAS FURTHER STATED THAT THE STEAM POWER IS BEING TR ANSMITTED THROUGH PROPER INFRASTRUCTURE OF PIPELINES TO PROCE SS DIVISION ASSESSEE CAN SELL THE POWER/STEAM TO OTHER PARTIES BUT DUE TO BAN/RESTRICTION PUT BY GOVERNMENT OVER ITS TRADING IT IS NOT SELLING STEAM THIS CONTENTION OF ASSESSEE IS SUPPORTING THE VIEW TAKEN BY TIN. DEPARTMENT ONLY THAT STEAM IS A NON TRADABLE C OMMODITY. THIS IS BECAUSE STEAM IS NOT CAPABLE OF BEING TRANS PORTED TO A DISTANT PLACE BECAUSE IT COULD LOSE ITS POTENTIAL H EAT. MOREOVER, BECAUSE OF HUGE REQUIREMENT OF COMPRESSOR POWER FOR TRANSPORTATION AND CAPITAL COST OF EQUIPMENT LIKE C OMPRESSOR, PIPING ETC, IT IS UNECONOMICAL TO TRANSPORT IT TO N EARBY LOCATION AS THE STEAM IS OF LOW PRESSURE & DENSITY. THUS, ST EAM IS NOT MARKETABLE COMMODITY AND THUS, DOES NOT HAVE ANY MA RKET VALUE. THE VALUE OF STEAM HAS TO BE TAKEN AS ITS COST OF P RODUCTION I.E. RS. 0.92/KG. IV) THE ASSESSEE HAS ALSO STATED THAT 'SINCE THE CO NSUMPTION IN DIFFERENT PROCESS OF TEXTILE UNIT WOULD HAVE INCREA SED THE COST OF FUEL /RAW MATERIALS IN THE OPERATIONS AND SINCE THE GENERATION OF STEAM IN THE COGENERATION OF POWER AND STEAM IN THE CAPTIVE POWER UNIT RESULTED IN SAVINGS, THE ASSESSEE CONSID ERED THAT TO BE ITS INCOME IN THE PROFIT & LOSS ACCOUNT OF THE CPP. THIS CONTENTION IS TO TOTALLY IMAGINARY AND WITHOUT ANY BASIS. IT IS ESTABLISHED THAT STEAM IS GENERATED BY USING BOI LER & FUEL AND EVEN IF THE CAPTIVE POWER PLANT WOULD NOT HAVE BEEN THERE THE ASSESSEE WOULD HAVE GENERATED STEAM BY USING FUEL A ND BOILER AND IT IS ALSO ESTABLISHED THAT COST OF GENERATION OF STEAM IS RS. 0.92 PER KG. OF STEAM. AS FAR AS POWER IS CONCERNED IT IS TRUE THAT THE ELECTRICITY WHICH IS AVAILABLE IN MARKET IS AT HIGHER RATE BECAUSE MARKET RATE OF ELECTRICITY IS DECIDED AFTER TAKING INTO ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 14 - ACCOUNT TRANSMISSION AND DISTRIBUTION LOSSES OF POW ER, IF THE ELECTRICITY IS GENERATED CAPTIVELY THEN SAVING IS T HERE BUT IN CASE OF STEAM IT HAS TO BE GENERATED CAPTIVELY AND IT CA N NEVER BE PURCHASED FROM OUTSIDE. BY ESTABLISHING A CAPTIVE P OWER PLANT FOR GENERATION OF STEAM THE ASSESSEE CANNOT GENERAT E PROFITS BECAUSE IN ANY CASE IT HAS TO PRODUCE STEAM IN ITS FACTORY FOR USE IN ITS PROCESS HOUSE. V) THE ASSESSEE HAS RELIED ON THE DECISION OF HON'B LE DELHI HIGH COURT IN THE CASE OF M/S. KHAITAN CHEMICALS & FERTI LIZERS LTD., WHEREIN THE COURT HAS ALLOWED THE CLAIM U/S. 80IA W HERE THE COMPANY HAS PRODUCED STEAM IN THE CAPTIVE POWER PLA NT LOCATED IN THE STATE OF MP AND TRANSFER THE STEAM AT THE RA TE OF RS. 1.7 PER KG. TO ITS FERTILIZER UNIT. THE FACTS OF THE CA SE REFERRED TO BY THE ASSESSEE ARE TOTALLY DISTINGUISHABLE. IN THAT C ASE THE ASSESSEE HAD A FERTILIZER PLANT AND IN THE PROCESS OF MANUFA CTURING OF FERTILIZER HUGE AMOUNT OF STEAM IS GENERATED WHICH IS BEING USED FOR GENERATION OF POWER. MOREOVER, THE DECISION OF HIGH COURT WAS NOT ON PRICE OF STEAM RATHER IT WAS ON THE ISSU E OF WHETHER INTRA UNIT TRANSFER HAS TO BE TREATED SALE/DISTRIBU TION OF POWER WITHIN THE MEANING OF PROVISIONS OF SEC. 80IA(4) OF THE ACT THEREFORE, IN VIEW OF THE DETAILED REASONS MENTIONE D ABOVE FOLLOWING FACTS EMERGE:- I). COST OF PRODUCTION OF STEAM BY CAPTIVE POWER P LANT IS RS.0.92/KG. II). ONLY METHOD OF GENERATING STEAM IS BY BURNIN G FUEL AND USING BOILER WHICH IS BEING DONE BY CAPTIVE POWER PLANT A ND BY PROCESS DIVISION. III). EVEN IF THE CAPTIVE POWER PLANT WOULD NOT HAVE BEEN THERE THE STEAM WOULD HAVE BEEN GENERATED BY USING FUEL & BOI LER ONLY. CAPTIVE POWER PLANT HAS NOT USED SOME OTHER COST SA VING TECHNOLOGY FOR GENERATING STEAM. IV). STEAM IS NOT A TRADABLE COMMODITY. IT CANNO T BE PURCHASED FROM OPEN MARKET. V). DEDUCTION U/S. 80IA IN RESPECT OF CAPTIVE POW ER PLANT UNDERTAKING IS IN RESPECT OF PROFITS DERIVED FROM S ELLING & ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 15 - DISTRIBUTION OF POWER. THE PROFITS CAN BE SAID TO B E DERIVED FROM CAPTIVE POWER PLANT, IF THE POWER IS BEING GENERATE D BY THE CAPTIVE POWER PLANT AT A RATE WHICH IS LOWER THAN T HE MARKET RATE. IT IS TRUE THAT THE ELECTRICITY GENERATED BY THE CAPTIVE POWER PLANT IS AT LOWER RATE AS COMPARED TO MARKET RATE. HOWEVER, IN THE INSTANT CASE THE 78.9% OF THE TOTAL PROFIT GENE RATED BY THE CAPTIVE POWER PLANT IS IN RESPECT OF SALE OF STEAM. THE STEAM CANNOT BE PURCHASED FROM OPEN MARKET IT H AS TO BE PRODUCED INTERNALLY BY FUEL & BOILER EVEN IF THE CA PTIVE POWER PLANT WOULD NOT HAVE BEEN THERE THE COST OF PRODUCT ION OF STEAM WOULD HAVE BEEN SAME. THE CAPTIVE POWER PLANT CANNO T BE SAID TO HAVE DERIVED PROFIT FROM SALE OF STEAM AT ARBITR ARY PRICE OF RS.1.15 PER KG. TO PROCESS HOUSE. THE SALE PRICE HA S TO BE TAKEN AS COST OF PRODUCTION OF STEAM I.E. RS. 0.92 PER KG .' (VI) THE A.O. THEREFORE HELD 'IN VIEW OF THE ABOVE THE PROFIT OF RS. 2,70,69,861 /- CLAIMED IN RESPECT OF SALE OF STEAM TO PROCESS IS DISALLOWED'. 3. THEREAFTER, ASSESSEE PREFERRED APPEAL BEFORE THE LD. CIT(A) AGAINST THE DISALLOWANCE OF RS.2,70,69,861/- WHILE COMPUTIN G THE DEDUCTION U/S.80IA(4) OF THE ACT. LD. CIT (A) ALLOWED THE APP EAL OF THE ASSESSEE WITH FOLLOWING OBSERVATION: IT IS THEREFORE, THE PROFIT ELEMENT EMBEDDED IN PR ODUCTION AND CAPTIVE CONSUMPTION OF STEAM FOR TEXTILE PROCESSING IS INCL UDED IN THE ULTIMATE PROFIT RESULTED FROM SALE OF TEXTILE. THIS PROFIT M AY BE MORE THAN THE PROFIT IN OTHER ACTIVITIES OF TEXTILE DIVISION OR M AY BE LESS. BUT, THE PROFIT FROM SUCH ACTIVITY IS THERE AND IT WILL ALWAYS BE H IGHER THAN THE COST. THE QUESTION OF DISINTEGRATION OF SUCH PROFIT IS BA SED ON PROPER COMPARABLE SUCH AS CHARTERED ENGINEER CERTIFICATE O R FROM THE COMPARISON OF PROFIT MARGIN BY ELECTRICITY GENERATI NG COMPANIES THEN THE SAME HAS TO BE ACCEPTED. THIS FURTHER REAFFIRMS AS HELD BY ME EARLIER THAT SUCH PROFIT IS ALSO REFLECTED BY THE S AVING COST IN ULTIMATE PRODUCTION OF FINAL PRODUCT THROUGH SUCH CAPTIVE CO NSUMPTION. ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 16 - AS FAR AS LEGAL PROPOSITION IS CONCERNED, HON'BLE S UPREME COURT HAS CONSISTENTLY HELD THAT INCENTIVE PROVISIONS, WH ICH CONFER CONCESSION, SHOULD BE INTERPRETED IN A LIBERAL MANNER, SO AS TO SUB-SERVE THE PURPOSE FOR WHICH THEY ARE INTENDED. IN BAJAJ TEMPO LTD. VS CIT(1992) 196 ITR188, THE SUPREME COURT HELD THAT AND PROVISI ON IN TAXING STATUTE GRANTING INCENTIVES FOR PROMOTING OF GROWTH AND DEV ELOPMENT SHOULD BE CONSTRUED LIBERALLY. IT REFERRED TO A SIMILAR VIEW TAKEN IN BROACH DIST. CO.OP. COTTON SALES, GINNING AND PROCESSINGS SOCIET Y LTD. (1989) 177 ITR 418 (SC), C1T VS STRAWBOARD MANUFACTURING CO. L TD. (1989) 177 ITR 431 (SC) AND CBDT VS ADITYA V. BIRLA (1989) 170 ITR 137 (SC), WHICH THE GENERAL RULE IS THAT THE PROVISION RELATI NG TO DEDUCTIONS, ALLOWANCES AND EXEMPTIONS ARE EXPECTED TO BE INTERP RETED RIGIDLY, INCENTIVE PROVISIONS ARE TO BE INTERPRETED DIFFEREN TLY AS, THEY FORM AN EXCEPTION TO THE RULE. IN IS FACT ON RECORD THAT THIS IS NOT THE FIRST SUC H CLAIM BY APPELLANT AND IN EARLIER YEARS ON THE BASIS OF SUCH VALUATION, DEDUCTION U/S.80IA(4)(IV) OF THE ACT. WERE ALLOWED FROM A.Y. 06-07. THE APPELLANT IS THEREFORE ON THE PRINCIPLE OF CONSISTENCY, ELIGI BLE FOR SUCH DEDUCTION. FURTHER AS REQUIRED APPELLANT FILED A CERTIFICATE I NFORM 10CCB FROM A CHARTED ACCOUNTANT OF CLAIM AND THEREFORE THE REASO NABLENESS AND VALUATION OF STEAM IS CERTIFIED THROUGH THAT CERTIF ICATE WITH ELIGIBLE DEDUCTION. 5.3. THE APPELLANT'S GROUND 1 TO 3 ARE INTERLIN KED AND AGAINST DISALLOWANCE OF RS.2,70,69,861 U/S.80IA OF THE ACT. ON THE BASIS OF ABOVE DISCUSSION, ANALYSIS AND LEGAL PROPOSITI ON, THE A.O. IS NOT JUSTIFIED IN DISALLOWING THE SAME. THE A.O. IS DIR ECTED TO ALLOW SUCH CLAIM BASED ON PROPER FACTS, ELIGIBLE CONDITION AND PROPER WORKING OF SUCH DEDUCTION. THE A.O. IS DIRECTED TO DELETE THE ADDITION SO MADE AND APPELLANT GETS RELIEF ACCORDINGLY. ALL THE THREE GR OUNDS ARE TREATED AS ALLOWED. 5.4. IN RESPECT OF GROUND RELATED TO INITIATION OF PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT, THE SAME IS NOW CONSEQUEN TIAL AND TREATED AS ALLOWED. 6. IN RESULT, THE APPEAL OF APPELLANT IS ALLOWED. ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 17 - 4. NOW APPEAL IS BEFORE US. 5. WE HAVE GONE THROUGH THE RELEVANT RECORD AND IMP UGNED ORDER. LD. AR CITED FOLLOWING JUDGMENTS IN SUPPORT OF ITS CONTENTION: (I). THE ASSESSEE ILLUSTRATED THIS RATIO AS ADOPT ED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF HPCL VS. DCIT (SUP RA) WITH FOLLOWING WORDS: 'IN THE CASE OF STEAM GENERATED, THE POSSIBILITY OF THE SALE OF THE STEAM IN OPEN MARKET IS RULED OUT DUE TO RESTRICTIO N ON SALE IN OPEN MARKET. ONCE THE CONSUMPTION IN DIFFERENT PROC ESS OF THE TEXTILE UNIT WOULD HAVE INCREASED THE COST OF FUEL/ RAW MATERIAL IN THE OPERATIONS AND SINCE THE GENERATION OF STEAM IN THE COGENERATION OF POWER AND STREAM IN THE CAPTIVE POW ER UNIT RESULTED IN SAVINGS, THE ASSESSEE CONSIDERED THAT T O BE ITS INCOME IN THE PROFIT AND LOSS ACCOUNT OF THE CPP. THIS WAS FOLLOWED BY REFLECTING THE TOTAL COST OF ASSESSEE FOR 117695051 KGS OF STEAM AT RS.1.15 PER KG. AT RS.13,53,49,309 AS AGAINST TH E AVERAGE COST (AS PER CHARTERED ENG. ) AT RS. 1.16 TO 1.24 AT RS. 14,12,34,061. (VII) THE ASSESSEE GIVEN FOLLOWING EXAMPLE TO JUSTI FY AND ESTABLISH THE CONTENTION OF SALE PRICE OF STEAM ADO PTED AT RS.1.15 PER KGS OVER COST OF 9.92 PER KG. I.E. 25% ON THE PRINCIPLE OF COST PLUS METHOD. (A) IN THE CASE OF M/S. KHAITAN CHEMICALS AND FERTILIZERS HON'BLE MP HIGH COURT ALLOWED TRANSFER OF STEAM AT RS.1.70 PER KG. (B) TORRENT POWER LTD., A BIGGEST POWER GENERATOR COMPANY IN THE AHMEDABAD REGION HAS POSTED PBT MARGIN OF 21.86% IN A.Y.2011-12. (C) AS PER ACCEPTED ENGG. STANDARD 4.7 KGS. OF STEA M IS EQUIVALENT TO 1 UNIT OF ELECTRICITY. ON THIS BAS IS THE SALE PRICE OF 117695051 KGS. OF STEAM @ 1.15/KGS. GIVES TOTAL ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 18 - SALE CONSIDERATION OF RS.13,53,49,309 WHILE IF CONV ERSION FACTOR OF 4.7 KG. STEAM PER UNIT OF ELECTRICITY THE N TOTAL EXPENDITURE FOR ELECTRICITY AT RS.5.5 PER UNIT WILL RESULT INTO RS.13,77,28,251 I.E. SAVING OF TOTAL EXPENDITU RE ON THE SALE PRICE OF STEAM. (II). (E) THE HON'BLE DELHI HIGH COURT D ECISION IN THE CASE OF M/S. KHAITAN CHEMICAL & FERTILIZERS LTD. (SUPRA) DO REFLECT THE USE OF STEAM GENERATED IN CAPTIVE POWER PLANT USED IN FERTILIZER PLANT AT 1.70 PER KGS. AND ELIGIBLE FOR DEDUCTION U/S.80IA OF THE ACT BUT IT DOES NOT DEAL WITH PRICI NG OF STEAM. (III). HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. DCM SHRI RAM CONSOLIDATED LTD. AS RELIED ON BY APPELLANT THOUGH THE ISSUE WAS RELATED TO COMPUTATION OF BOOK PROFIT U/S.115 JA BU T IT WAS HELD THAT- 'PRINCIPLE OF APPORTIONMENT OF PROFITS RESTING ON D ISINTEGRATION OF ULTIMATE PROFITS REALIZED BY THE ASSESSEE BY SAL E OF FINAL PRODUCT HAS TO BE APPLIED I.E. PROFIT DERIVED BY AS SESSEE ON TRANSFER OF ENERGY FROM ITS CAPTIVE POWER GENERATIO N PLANTS TO ITS OTHER UNIT IS EMBEDDED IN THE ULTIMATE PROFIT EARNE D ON SALE OF ITS FINAL PRODUCTS.' THE HON'BLE HIGH COURT HELD THAT 'IT CANNOT BE SAID THAT THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS. AS RIGHTLY HELD BY THE TRIBUNAL, THE ASSE SSEE HAD BEEN AUTHORISED BY THE STATE ELECTRICITY BOARDS TO GENER ATE ELECTRICITY. THE GENERATION OF ELECTRICITY HAS BEEN UNDERTAKEN B Y THE ASSESSEE BY SETTING UP A FULLY INDEPENDENT AND IDENTIFIABLE INDUSTRIAL UNDER- TAKING. THESE UNDERTAKINGS HAVE SEPARATE AND INDEPENDENT INFRA- STRUCTURES, WHICH ARE, MANAGED INDEPENDENTLY AND WHOSE ACCOUNTS ARE PREP ARED AND MAINTAINED SEPARATELY AND SUBJECTED TO AUDIT. THE T ERM 'BUSINESS' WHICH PREFIXES GENERATION OF POWER IN CLAUSE (IV) O F THE EXPLANATION TO SECTION 115JA IS NOT LIMITED TO ONE WHICH IS PROSECUTED ONLY BY ENGAGING WITH AN OUTSIDE THIRD P ARTY. THE MEANING OF THE WORD 'BUSINESS' AS DEFINED IN SECTIO N 2(B) OF THE ACT INCLUDES ANY TRADE, COMMERCE OR MANUFACTURE OR ANY ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 19 - ADVENTURE OR CONCERN IN THE NATURE OF TRADE, COMMER CE OR MANUFACTURE. THE DEFINITION OF BUSINESS', WHICH IS INCLUSIVE, CLEARLY BRINGS WITHIN ITS AMBIT THE ACTIVITY UNDERT AKEN BY THE ASSESSEE, WHICH IS, CAPTIVE GENERATION OF POWER FOR ITS OWN PURPOSES. THE APPROACH OF THE CIT(A) AND, CONSEQUEN TLY THE TRIBUNAL, BOTH IN LAW AND ON FACTS CANNOT BE FAULTE D WITH. WE ARE OF THE OPINION THAT THE ASSESSING OFFICER CLEARLY E RRED IN HOLDING THAT, SINCE THE MAIN BUSINESS OF ASSESSEE IS OF MAN UFACTURE AND SALE OF UREA IT COULD NOT BE SAID TO BE IN THE BUSI NESS OF GENERATION OF POWER IN TERMS OF EXPLANATION (IV) TO SECTION 115JA OF THE ACT.' (IV) THE HON'BLE SUPREME COURT IN THE CASE OF TATA IRON & STEEL CO. LTD. AND OTHERS VS. STATE OF BIHAR IN 48 ITR 123 W HICH IS CONSIDERED AS LAND MARK CASE IN RESPECT OF APPORTIO NMENT OF PROFIT PARTICULARLY FROM THE CAPTIVE CONSUMPTION OF A PRODUCT TO PRODUCE ANOTHER PRODUCT HELD THAT - 'THAT EVEN IN CASES WHERE THE PROFIT RESULTING FROM AN ULTIMATE ACTIVITY IS BROUGHT TO TAX, THERE COULD BE AN APPOR TIONMENT IF THERE WERE AN EXEMPTION IN RESPECT OF THE PROFITS R ESULTING FROM DISTINCT ACTIVITIES AT EARLIER STAGES IS ILLUSTRATE D BY THE PROVISIONS OF THE INDIAN INCOME-TAX ACT ITSELF. THU S, IN THE CASE OF, SAY, A SUGAR MILL, WHICH GROWS ITS OWN CANE, IN THE ABSENCE OF ANY EXEMPTION FOR THE INCOME DERIVED FROM AGRICU LTURE, I.E., FROM THE PRODUCTION OF THE CANE, THE ENTIRE PROFIT OF THE MILLS FROM THE SALE OF THE SUGAR WOULD HAVE TO BE INCLUDE D IN THE TAXABLE PROFITS UNDER SECTION 10 OF THE INCOME-TAX ACT. BUT SECTION 4(3)(VIII) EXEMPTS AGRICULTURAL INCOME AS D EFINED IN SECTION 2(1). THE RESULT, THEREFORE, IS THAT THERE IS A DISINTEGRATION OR DICHOTOMY OF THE 'INCOMES, PROFIT S OR GAINS OF THE BUSINESS AND OF AGRICULTURAL INCOME, SO THAT TH ERE HAS TO BE AN APPORTIONMENT BETWEEN THE TWO IN ORDER TO DETERM INE THE TAXABLE INCOME OF AN ASSESSEE. IT IS ON ACCOUNT OF THIS SITUATION THAT SECTION 59(2) OF THE INCOME-TAX ACT PROVIDES F OR RULES BEING MADE FOR PRESCRIBING THE MANNER IN WHICH AND THE PROCEDURE BY WHICH INCOMES DERIVED IN PART FROM AGR ICULTURE AND IN PART FROM BUSINESS SHALL BE ARRIVED AT. . . ,' (P. 139)' ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 20 - 6. IN EARLIER YEARS, ON THE BASIS OF SUCH VALUATION , DEDUCTION U/S. 80IA (4)(IV) OF THE ACT WERE ALLOWED FROM A.Y. 06-07. IN OUR CONSIDERED OPINION, ASSESSEE IS THEREFORE ON THE PRINCIPLE OF CONSISTENCY, ELIGIBLE FOR SUCH DEDUCTION. FURTHER AS REQUIRED ASSESSEE FILED A CERTIFICATE INFORM 10CCB FROM A CHARTED ACCOUNTANT FOR CLAIM AND THERE FORE THE REASONABLENESS AND VALUATION OF STEAM IS CERTIFIED THROUGH THAT CERTIFICATE IS ELIGIBLE DEDUCTION. IN SUPPORT OF ITS CONTENTION , ASSESSEE ALSO FILED A RATE CHART AT PAGE NO.13 OF PAPER BOOK AND SAME IS REPRODUCED AS UNDER: VISHAL FABRICS PRIVATE LIMITED STATEMENT OF COMPUTATION OF COST OF STEAM AND POWER SN PARTICULARS 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 A QUANTITATIVE DETAILS 1 TOTAL STEAM GENERATION KGS 157762938 KGS 159223900 KGS 154169059 154614651 155172583 146106760 2 STEAM TO PROCESS KGS 117695051 KGS 114333615 KGS 109171082 107678291 110573541 106190960 3 STEAM POWER PLANT KGS 40067887 KGS 44890285 KGS 44997977 46936360 44599042 39915800 4 FUEL COSUMED (LIGNITE) KGS 46007204 KGS 43078021 KGS 43371340 38118207 37910326 35607106 5 STEM/FUEL RATIO A1/A3 3.43 3.70 3.55 4.06 4.09 4.10 - 0 TOTAL POWER GENERATED UNI TS 14023208 UNITS 15220300 UNIT S 14708800 14889700 14890900 14060310 POWE PLANT CONSUMPTION UNI TS 3011739 UNITS 3035967 UNIT S 2960203 3032648 3047536 2952422 POWER TO PROCESS UNI TS 11011469 UNITS 12184333 UNIT S 11748597 11857052 11843364 11107888 B EXPENSES INCURRED TOTAL RS/ KC TOTAL RS/ KG TOTAL *S/K G 1 LIGNITE & COAL RS. 117202086 RS. 111244170 RS. 125388619 88141936 73476124 58649912 ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 21 - 2 MAINTENANCE EXPENSES RS. 13569303 RS. 7530700 RS. 11263070 8103337 7048532 625896 3 SALARIES & WAGES RS. 3371517 RS. 3459680 RS. 3096961 3730681 2906145 1977572 4 INTEREST RS. 361661 RS. 859515 RS. 1495029 2321120 2382390 2845500 5 DEPRECIATION RS. 11149377 RS. 11149458 RS. 11149556 11149446 11107858 11107858 0 TOTAL EXPENSES RS. 145653944 0.92 RS. 134243523 0.84 RS. 152393235 0.99 113446520 0.73 96921049 0.62 75206738 0.51 C COST PER KG OF STEAM RS. RS. RS. 0.73 0.62 0.51 D STEAM USED IN PROCESS KGS 117695051 KGS 114333615 KGS 109171082 107678291 110573541 106190960 E STEAM COST CHARGED TO PROCESS RS. 135349309 1.15 RS. 131483657 1.15 RS. 12S546744 1.15 86142633 0.80 71872809 0.65 47785932 0.45 GENERATING POWER RS. 10304635 RS. 2759866 RS. 26846491 27303887 25048240 27420806 7. WE HAVE ALSO GONE THROUGH THE ASSESSMENT ORDER I N DETAILS IN THAT THERE IS A FINDING OF THE AO IN PAGE NO.9 PARA II, WHEREIN SHE HAS STATED THAT 80IA(4) IS AN ALLOWABLE DEDUCTION ON STEAM AND THERE IS NO DISPUTE ON IT, STEAM HAS ALREADY BEEN HELD TO BE POWER WITH IN THE MEANING OF SECTION 80IA(4) OF THE ACT. WHEN ON ONE HAND AO HER SELF IS ACCEPTING ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 22 - THAT STEAM IS ELIGIBLE FOR DEDUCTION AND ON THE OTH ER HAND SHE IS DISALLOWING THE DEDUCTION, IT ITSELF IS CONTRADICTO RY, WHEN ONCE THE AO IS OF THE OPINION THAT DEDUCTION IS AVAILABLE ON STEAM THEN NO DISALLOWANCE SHOULD HAVE BEEN MADE ONLY ON ASSUMPTIONS BASIS. TH E ASSESSEE HAS SUBMITTED SEVERAL DECISIONS IN SUPPORT OF ITS CONTE NTION AND SAME ARE STATED THEREIN, THE STEAM WAS TRANSFERRED AT A HIGH ER PRICE. FURTHER ASSESSEE HAS SUBMITTED ENGINEER CERTIFICATE AT PAGE NO.10 OF PAPER BOOK IN WHICH ALSO THE COST OF GENERATION OF STEAM CAN B E CONSIDERED IN THE RANGE OF RS.1.16/- TO 1.24/- PER KG OF STEAM. FURTH ER THE SAVING IN COST DUE TO CAPTIVE PRODUCTION ALSO CANNOT BE RULED OUT WHICH HAS BEEN ELABORATED DISCUSSED BY THE LD. CIT(A). 8. WE THEREFORE, RELYING ON VARIOUS DECISION IN SUP PORT OF THE CLAIM MADE BY THE ASSESSEE AND ACCEPTANCE BY THE AO THAT STEAM IS A FORM OF POWER AND ELIGIBLE FOR DEDUCTION AND FOR THE BASIS OF DEDUCTION RELYING ON THE ENGINEERS CERTIFICATE AS WELL DIFFERENT CASE LA WS HELD. CIT(A) HAS RIGHTLY DELETED THE ADDITION AND PROFIT MARGIN KEPT BY THE ASSESSEE IN CAPTIVE CONSUMPTION IS FAIR AND REASONABLE. IN OUR CONSIDERED OPINION ON THE BASIS OF CONSISTENCY AND LD. CIT(A) HAS PASSED A DETAILED AND REASONED ORDER. WE UPHELD THE ORDER OF LD. CIT(A). ITA NO. 125/AHD/2015 DCIT VS. VISHAL FABRICS PVT. LTD. A.Y. 2011-12 - 23 - 9. IN THE RESULT, APPEAL FILED BY THE DEPARTMENT IS DISMISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 24/01/2018 SD/- SD/- ( ) 4 5 ( N.K. BILLAIYA ) ( MAHAVIR PRASAD ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 24/01/2018 PRITI YADAV, SR. PS !'# $#! # COPY OF THE ORDER FORWARDED TO : 1. !$' / THE APPELLANT 2. ($' / THE RESPONDENT. 3. 67- + 8- / CONCERNED CIT 4. + 8- 4!5 / THE CIT(A)-XIV, AHMEDABAD. 5. 9:;-67 !.!672 ! / DR, ITAT, AHMEDABAD 6. ;<=, # GUARD FILE. % & / BY ORDER, (9-- //TRUE COPY// '/& () ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION 16/01/2018 . 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 17/01/2018 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER