M/s Mangalore Chemicals and fertilizers Limited , Bangalore V. Assistant Commissioner of Income tax Circle-4(1)(2), Bangalore

ITA 2922/BANG/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2393 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 23-10-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Gift; Depreciation; Capital expenditure; Liquidation; Capital Gains
• Section: 43; 48; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESEIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER ITA Nos.2921 & 2922/Bang/2018 Assessment years : 2014-15 & 2013-14 M/s Mangalore Chemicals & Fertilizers Limited., Level II, UB Tower, UB City, 24, Vittal Mallya Road, Bangalore - 560 001. PAN: AABCM 3599G Vs. The Assistant Commissioner of Income Tax, Circle 4(1)(2), Bangalore. APPELLANT RESPONDENT Assessee by : Shri V. Sridharan, Sr. Advocate Respondent by : Shri Sri. V S Chakrapani, CIT(DR)(ITAT), Bengaluru. Date of hearing : 21.06.2022 Date of Pronouncement : 28.06.2022 O R D E R Per Padmavathy S., Accountant Member ITA No.2922/Bang/2018 & ITA No.2921/Bang/2018 are appeals by the Assessee against two orders both dated 24.8.2018 of CIT(Appeals)-4, Bangalore, relating to AYs 2013-14 & 2014-15. 2. The issue that arises for consideration in both the appeals is as to whether the revenue authorities were justified in rejecting the claim of the Assessee for weighted deduction u/s.35AD of the Income Tax Act, ITA Nos.2921 & 2922/Bang/2018 Page 2 of 24 1961 (Act). The issue arises for consideration in both the AYs under identical facts and circumstances. These appeals were heard together. We deem it convenient to pass a common order. 3. Section 35AD of the Act was introduced by the Finance Act (No. 2) of 2009 w.e.f. April 1, 2010 allowing 100 percent deduction of any capital expenditure (other than expenditure on land, goodwill or financial instruments) incurred by the taxpayer, wholly and exclusively for the purpose of a specified business. Also, where in case the operations commence on or after April 1, 2012, the expenditure will qualify for an enhanced deduction of 150%, subject to conditions specified in the section. In order to provide impetus to the fertilizer industry, section 35AD of the Act was amended vide Finance Act, 2011 where in 'production of fertilizer' as a specified business was included therein. However, for the purpose of claiming deduction under section 35AD, the condition provided therein mandates that the assessee must commence its operations on or after April 1, 2011 in "a new plant" or in "a newly installed capacity in an existing plant". The relevant extracts of section 35AD of the Act are reproduced herein below for ready reference:- "35AD (1) An assessee shall be allowed a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him . Provided that the expenditure incurred, wholly and exclusively, for the purposes of any specified business, shall be allowed as ITA Nos.2921 & 2922/Bang/2018 Page 3 of 24 deduction during the previous year in which he commences operations of his specified business, the expenditure is incurred prior to the commencement of its operations; and the amount is capitalised in the books of account of the assessee on the dale of commencement of its operations (1A) Where the specified business is of the nature referred to in sub-clause (i) or sub-clause (ii) or sub-clause (v) or sub-clause (vii) or sub-clause (viii) of clause (c) of sub-section (8) and has commenced its operations on or after the 1st day of April, 2012, the deduction under sub -section (1) shall be allowed of an amount equal to one and one -half times of the expenditure referred to therein. (2) This section applies to the specified business which fulfils all the following conditions, namely, – (i) it is not set up by splitting up, or the construction of a business already in existence; (ii) it is not set up by the transfer to the specified business of machinery or plant previously used for any purpose: ............ (5) The provisions of this section shall apply to the specified business referred to in sub-section (2) if it commences its operations, — ........... (ae) on or after the 1st day of April, 2011, in a new plant or in a newly installed capacity in an existing plant for production of fertilizer; ........... (8) For the purposes of this section, – ITA Nos.2921 & 2922/Bang/2018 Page 4 of 24 (c) "specified business" means any one or more of the following business, namely :- ....... (viii) production of fertilizer in India;” 4. The Assessee is a company engaged in the business of manufacture and sale of fertilizers. During the previous year relevant to AY 2013-14, the assessee claimed an amount of Rs. 2,06,34,53,394/- as deduction u/s 35AD of the Income-tax Act, 1961 [the Act] being 150% of the investment amounting to Rs. 137,56,35,596/- in three captive power generating units [`CPP’], 6 waste heat recovery boilers and other assets ['Plant and Machinery')]. During the previous year relevant to AY 2014-15, the assessee claimed an amount of Rs. 81,00,15,756/- as deduction u/s 35AD of the Income- tax Act, 1961 [the Act] being 150% of the investment amounting to Rs. 54,00,10,504/- in 1 captive power generating units [`CPP’] and other assets ['Plant and Machinery']. 5. It was the plea of the Assessee that fertilizer sector in India is a highly regulated sector where the fertilizer companies are governed by various policy directions of the Government of India so as to ensure supply of fertilizers at the right time and best price to the farming community across the country to ensure food security. Accordingly, all fertilizer companies are bound by the various policies and schemes issued from time to time by Department of Fertilizers, Ministry of Chemicals and Fertilizers, Government of India. Assessee being a ITA Nos.2921 & 2922/Bang/2018 Page 5 of 24 fertilizer company, is also required to comply with all the policies and schemes notified by the Department of Fertilizers. 6. Such adherence to policies/schemes helps in ensuring the receipt of subsidies by the fertilizer companies such as the assessee which ranges between Rs. 20,000 PMT to Rs. 40,000 PMT, thus, underlining the commercial dependency of fertilizer companies on the subsidies provided by the Government of India. 7. Vide Notification No. 12012/3/2006-FPP dated 08/03/2007, the Government of India through Ministry of Chemicals and Fertilizers, Department of Fertilizers, rolled out a Policy whereby conversion of non-gas based units to gas-based units was mandated providing conversion time period of 3 years from the end of the financial year. (Copy of the notification is at pages Pg. No. 31 to 37 of Paper Book (PB). The aforesaid notification in paragraph provides that all functional Naphtha and Furnace OIL (FO)/LSHS based units should get converted to Natural gas(NG) and Liquefied Natural Gas (LNG) based units within a period of 3 years, It further provides that on the expiry of the aforementioned period, the Government will not subsidize the high cost urea produced by the non-gas based urea units and rate of concession of such units will be restricted to the lower of the prevalent import parity price (IPP) or their own rate. Units not able to tie up fast will have to explore alternative feedstock like coal bed methane (CBM) and coal gas. ITA Nos.2921 & 2922/Bang/2018 Page 6 of 24 8. According to the Assessee, non-compliance with the aforementioned notification would have rendered non-availability of subsidy to the Assessee, thus, making the running of such plant by the Assessee commercially non-viable. In order to comply with the above mentioned notification, the assessee embarked upon the process of conversion of its Naphtha/Furnace Oil based existing plant & machinery into gas-based plant and machinery. 9. According to the Assessee captive power generating units are very integral in the process of manufacture of ammonia and urea. The position of fertilizer manufacturing prior to and after investment in new CPP may be depicted in the form of the following chart:- Plant Feedstock before the investment Feedstock after the investment Ammonia & Urea Manufacturing unit Naphtha Natural gas Captive Power generating unit Furnace Oil Natural gas 10. The Assessee pointed out that it was the responsibility of the Government of India to provide gas connectivity to manufacturing facility at Mangalore but the process of making necessary investments in Plant and machinery for manufacture of urea to be able to receive and use natural gas for its ammonia and urea production as well as in the captive power generating units was the responsibility of the Assessee. ITA Nos.2921 & 2922/Bang/2018 Page 7 of 24 11. The Assessee also pointed out that the annual installed capacity at the Mangalore Plant was 3,79,500 MTs of urea and it has to use the entire capacity to get subsidy from the Government. Once the annual installed capacity is achieved the Assessee has to shut down its plan and implementation of investment in the new plant was made during the annual shutdown spread over few years, as follows:- Previous year Assessment year Amount in Rs. Particulars 2012-13 2013-14 137,56,35,596 3 Captive Power generating units, 6 waste Heat Recovery Boilers 2013-14 2014-15 54,00,10,504 1 Captive Power generating units 2014-15 2015-16 142,98,35,558 2 captive power generating units and Plant and Machinery in ammonia section 12. Thus, as per the staggered implementation explained above, the Assessee completed the entire investment in urea/ammonia section together with the captive power generating units to continue to be qualified to receive subsidies. It was the plea of the Assessee that but for getting subsidy from the Government, it cannot operate even to recover its costs and therefore would have to abandon its manufacturing activity thereby rendering it’s installed capacity to zero. By making investment in CPP as above, the Assessee pleaded that in effect it was creating new installed capacity in an existing plant for production of fertilizers. ITA Nos.2921 & 2922/Bang/2018 Page 8 of 24 13. The Assessing Officer disallowed the claim of the assessee for the following reasons:- (i) That during the FY 2012-13 it is only the 3 captive power generating plants the expense of which were capitalized. (ii) During the FY 2012-13 there was no commencement of any new plant for specified business but only continuation of old business already in existence. (iii) Commencement of new specified business is a basic criterion for claiming deduction u/s 35AD of the Act and which is missing in the case of the Assessee. (iv) The Assessee has not actually commenced new business till FY 2014-15 because of the fact that the main plant of production of urea came into existence only during the FY 2014-15. (v) The generators which were capitalized in the FY 2012-13 were only ancillary units to main plant of urea production, which actually came into existence in FY 2014-15. (vi) The installation of new CPP plant does not amount to expansion of installed capacity, also, primarily section 35AD provides deduction to such plant., which came into existence on or after 01.04.2011 and there is installation new capacity in the subsequent financial years. In this regard the AO has also observed in paragraph 4.12 of his order (for AY 2013- 14) that the old installed capacity continued at all point of time. 14. The AO, however, allowed depreciation at 15% + 20% additional depreciation as per the provisions of Sec.32 of the Act in both the AY 2013-14 & 2014-15. 15. Aggrieved by the order of the AO denying benefit of deduction u/s.35AD of the Act, the Assessee preferred appeal before CIT(A). The ITA Nos.2921 & 2922/Bang/2018 Page 9 of 24 CIT(A) agreed with the findings of the AO in both the AYs 2013-14 & 2014-15. With regard to the alternate argument raised by the Assessee before the CIT(A) (order for AY 2013-14) that owing to the conversion of new generators, there was capacity enhancement and for the same reason, it was entitled to enhanced deduction u/s 35AD, he held that sub-section 5 of section 35AD, clearly indicates that these provisions are applicable for a specified business which commences its operations on or after 01.04.2011 in a new plant or in a newly installed capacity in an existing plant for production of fertilizers. It is also applicable to a specified business which has commenced its operations after 01.04.2011 and has done expansion of its installed capacity at a later date after 01.04.2011. The words "newly installed capacity in an existing plant' does not extend itself to be applicable even to that business which was existing prior to 01.04.2011 as was claimed by the assessee but restricts itself to a newly installed capacity in an existing plant later to 01.04.2011. The assessee's argument that these captive power generation units be treated as newly installed capacity in an existing plant for production of fertilizer doesn't stand scrutiny for the reason that primarily it is a deduction for such an existing plant which came into existence on or after 01.04.2011 and there is installation of new capacity only in the subsequent financial years. In the given facts & circumstances, what transpired during the year under consideration was only a replacement of certain captive power generators, which is merely in nature of plant up-gradation / replacement and which is not shown to have multiplied the capacity by any significant measure. The ITA Nos.2921 & 2922/Bang/2018 Page 10 of 24 CIT(A) also held that the relevant clause mentions words "newly installed" capacity which means that there should be extension to the installed capacity and simultaneously there should be significant increase in the capacity which was existing hitherto. The AO in this regard, categorically found / noted that, in the instant case there was no such scenario as the installed capacity of assessee's Urea operation is Rs.3,79,500 metric tonnes during the year as well as during the earlier years as also in the subsequent years. It is therefore apparent that there is nothing new which is installed by the assessee, so as to cause any major capacity-enhancement, during the period under consideration. The CIT(A) also concluded that, the assessee's expense on modification / up-gradation of the plant, could at best be considered as re-construction of an existing plant, which becomes specifically ineligible for the claim of additional deduction in terms of clause 35AD(2). The CIT(A) held that the section does not intend any deduction to an existing old business as it states clearly at clause 35AD(2) that the new specified business should not be formed by splitting or reconstruction of an already existing manufacturing facility. The CIT(A) also approved the argument of the AO that if the installed capacity of an entity is 'x' metric tonnes but by introduction of a new plant it has extended the capacity to `x + y' metric tonnes then the extra production out of additional 'y' metric tonnes can be treated as new but if someone tries to show the old 'x' as (x/2)+(x/ 2) metric tonnes then it is nothing but splitting. The AO has highlighted that, in the instant case there is no increase in capacity and the old capacity ITA Nos.2921 & 2922/Bang/2018 Page 11 of 24 continued. The assessee's alternate argument on basis of capacity enhancement is therefore not acceptable. 16. With regard to the main argument of the Assessee on eligibility of deduction u/s.35AD of the Act, the CIT(A) held that during the FY 2012-13 it is only the expenditure incurred on replacement of one captive power generating plant which has been capitalized, which does not constitute new plant or new capacity as envisaged in the section 35AD of the I.T. Act. During the FY 2012-13 there was no commencement of any new plant for specified business but only continuation of old business already in existence. What has therefore taken place during the year is merely replacement and up-gradation. The AO has adequately explained that, commencement of new specified business is a basic criterion for claiming deduction u/s 35AD of the Act and this criterion has not been satisfied in the case of the Assessee. The Assessee has not actually commenced new business till FY 2014-15 because of the fact that the main plant of production of urea came into existence only during the FY 2014-15, which therefore is not pertinent to the current year under consideration. The AO has brought out that, CPP which was capitalized in the FY 2012-13 were only ancillary units to the main-plant of urea production, which actually came into existence in FY 2014-15. It is apparent that, since there is no significant increase in capacity, the installation of new CPP plant does not amount to expansion of installed capacity. The AO also points out that, primarily section 35AD provides deduction to such ITA Nos.2921 & 2922/Bang/2018 Page 12 of 24 plants which came into existence on or after 01.04.2011 and there is installation of new capacity only in the subsequent financial years. 17. The CIT(A) also distinguished decision cited by the Assessee before the CIT(A) as factually not applicable and rendered in the context of indirect tax laws whose principles cannot be extended to a case under the Act. 18. Aggrieved by the orders of the CIT(A), the Assessee is in appeal before the Tribunal. The learned counsel for the Assessee submitted that Section 35AD of the Act grants deduction of capital expenditure, incurred wholly and exclusively, for the purposes of any specified business. The phrase "specified business" has been defined in Section 35AD(8)(c) of the Act which inter-alia includes "production of fertiliser in India" [clause (viii) to Section 35AD(8)(c)]. Thus, an assessee who is engaged in production of fertiliser in India, is required to comply with the following conditions, in order to claim deduction of capital expenditure u/s. 35AD of the Act:- • Expenditure is capital in nature; • Expenditure is incurred wholly and exclusively for the purpose of specified business; • Specified business is carried on in the previous year during which such expenditure is incurred by him; • Specified business is not set up by splitting up or the reconstruction of a business already in existence; • Specified business is not set up by the transfer of machinery or plant previously used for any purpose; ITA Nos.2921 & 2922/Bang/2018 Page 13 of 24 • Specified business commences its operations on or after 1 st April 2011, in a new plant or in a newly installed capacity in an existing plant for production of fertiliser. 19. The primary bone of contention of the lower authorities in rejecting the assessee's claim is based on interpretation of condition viz., Specified business commences its operations on or after 1 st April 2011, in a new plant or in a newly installed capacity in an existing plant for production of fertilizer. In the words of lower authorities, the production of fertiliser should commence operation in a new plant, on or after 1 st April 2011, or such production should commence in a newly installed capacity in an existing plant which been set-up on or after 1 st April 2011. This plant should be engaged in production of fertiliser alone and not in other products or processes which are ancillary to production of fertiliser. 20. The learned counsel for the Assessee submitted that the Assessee satisfies all the requirements for allowing deduction u/s.35AD of the Act and in this regard submitted that:- a) Captive power plant is an integral part in production of fertiliser. b) Captive power plant in question, on its own and by itself, qualifies as plant for production of fertiliser. • The requirement that specified business should commence operation in a new plant or newly installed capacity in an existing plant, would also include commencement of operation in those plants which forms integral part for production of fertiliser. • The requirement that the specified business should ITA Nos.2921 & 2922/Bang/2018 Page 14 of 24 commence operation in the newly installed capacity in an existing plant on or after 1 st April 2011 would not mean that such an existing plant should also be set-up on or after 1 st April 2011. c) Commencement of new specified business on or after 1 st April 2011 is not the criteria to claim deduction u/s. 35AD. d) Without prejudice to the above, installation of new captive power plant and other plant and machineries has created new capacity in the existing plant for production of fertiliser. • The requirement that specified business should commence operation in a new plant or newly installed capacity in an existing plant, would also include commencement of operation in those plants which forms integral part for production of fertiliser. • The requirement that the specified business should commence operation in the newly installed capacity in an existing plant on or after 1 st April 2011 would not mean that such an existing plant should also be set-up on or after 1 st April 2011. e) Setting up of new captive power plant does not amount to re-construction of an existing plant. f) Incentive beneficial provisions should be interpreted liberally. 21. The detailed submissions were made on as to how the requirements of each of the above conditions were satisfied in the case of the Assessee. Before we set out those contentions, we shall first set out the reasons why provisions of Sec.35AD of the Act, were introduced by the Finance Act, 2009 w.e.f. 1.4.2010. The same has been explained in the CBDT Circular No. Circular No.5/2010 dated 3.6.2010, in paragraph 16.1 to 16.7 and they read thus:- ITA Nos.2921 & 2922/Bang/2018 Page 15 of 24 “16. Investment-linked tax incentive for specified business 16.1 The Income-tax Act provides for a number of profit-linked exemptions/deductions. Such benefits are inefficient, inequitable, impose higher compliance and administrative burden, result in revenue loss, increase litigations and lead to competitive demand for similar tax benefits. Further, these benefits also encourage diversion of profits from the taxed sector to the exempt/untaxed sector. However, investment-linked incentives are relatively less distortionary in their impact. 16.2 With a view to creating rural infrastructure and environment friendly alternate means of transportation for bulk goods, provide investment-linked tax incentive has been provided by inserting a new section 35AD in the Income-tax Act for the following businesses:— (a) setting up and operating cold chain facilities for specified products; (b) setting up and operating warehousing facilities for storage of agricultural produce; Explanatory Circular for Finance (No.2) Act, 2009 Page 20 of 63 (c) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. 16.3 The salient features of the new regime of investment-linked tax incentives are the following:— (i) Hundred per cent deduction would be allowed in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of the specified business carried on during the previous year in which such expenditure is incurred. (ii) Capital expenditure incurred prior to the commencement of operations of the specified business and capitalised in the books of account of the assessee on the date of commencement of operations is also eligible for the deduction. (iii) The expenditure of capital nature shall not include any expenditure incurred on acquisition of any land or goodwill or financial instrument. (iv) The benefit is available— (a) in a case where the business relates to laying and operating a cross country natural gas pipeline network for distribution, if such business commences its operations on or after 1st April, 2007; and (b) in any other case, if such business commences its operation on or after the 1st April, 2009. (v) The assessee shall not be allowed any deduction in respect of the specified business under the provisions of Chapter VIA; (vi) No deduction in respect of the expenditure in respect ITA Nos.2921 & 2922/Bang/2018 Page 16 of 24 of which deduction has been claimed shall be allowed to the assessee under any other provisions of the Income-tax Act. (vii) Any sum received or receivable on account of any capital asset, in respect of which deduction has been allowed under section 35AD, being demolished, destroyed, discarded or transferred shall be treated as income of the assessee and chargeable to income tax under the head “Profits and gains of business or profession”. (viii) Any loss computed in respect of the specified business shall not be set off except against profits and gains, if any, of any other specified business. To the extent the loss is unabsorbed the same will be carried forward for set off against profits and gains from any specified business in the following assessment year and so on. 16.4 Further, profit-linked deduction provided under section 80-IA to the business of laying and operating a cross country natural gas distribution network will be discontinued. As a result, any person availing of this incentive can avail of the benefit under the proposed section 35AD. All capital expenditure (other than on land, goodwill and financial instrument), to the extent capitalized in the books as on 1st April, 2009 will be fully allowed as a deduction in the computation of total income of the said business for Explanatory Circular for Finance (No.2) Act, 2009 Page 21 of 63 the previous year 2009-10. This is available in addition to any other capital expenditure (excluding land, goodwill and financial instrument) incurred during such previous year. 16.5 The provisions of section 28, section 43 and section 50B of the Income-tax Act have also been amended to make consequential changes. Thus, any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD, shall be treated as taxable under section 28. Further, the actual cost of any capital asset on which deduction has been allowed or is allowable to the assessee under section 35AD, shall be treated as ‘nil’ under section 43 in the case of such assessee and in any other case if the capital asset is acquired or received - (i) by way of gift or will or an irrevocable trust; (ii) on any distribution on liquidation of the company; and (iii) by such mode of transfer as is referred to in clauses (i), (iv), (v), (vi), (vib), (xiii) and (xiv) of section 47. Also, while computing capital gains in case of ITA Nos.2921 & 2922/Bang/2018 Page 17 of 24 slump sale under section 50B, the aggregate value of total assets for computing the net worth in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD shall be treated as nil. 16.6 A new section 73A has also been inserted to give effect to the consequential provisions introduced in section 35AD. Thus, any loss computed in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business. Further, where for any assessment year any loss computed in respect of the specified business has not been wholly set off against profits and gains of another specified business, so much of the loss as is not so set off or the whole loss where the assessee has no income from any other specified business shall be carried forward to the following assessment year, subject to the other provisions of Chapter VI and - (i) it shall be set off against the profits and gains, if any, of any specified business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. 16.7 Applicability - These amendments will be effective from 1st April, 2010 and will accordingly apply in respect of assessment year 2010-11 and subsequent assessment years.” 22. “Production of fertilizer in India” was introduced as a specified business by introduction of Clause (c ) to Sub-Section 8 of Sec,35AD by the Finance Act, 2011 w.e.f.1-4-2012. By the very same Finance Act, the condition for allowing deduction was specified by clause (ae) of Sub-Section (5) of Sec.35AD and the same reads thus:- “(ae) on or after the 1st day of April, 2011, in a new plant or in a newly installed capacity in an existing plant for production of fertilizer; and"; 23. Section 35AD (1) provides that deduction shall be allowed in respect of whole of any expenditure of capital nature incurred, wholly ITA Nos.2921 & 2922/Bang/2018 Page 18 of 24 and exclusively, for the purposes of any specified business carried by an Assessee during the previous year in which such expenditure is incurred by him. The proviso to Sec.35AD(1) lays down that the deduction shall be allowed only in the previous year in which the Assessee commences operations of his specified business, i.e., in this case “production of fertilizer in India”. 24. A combined reading of the provisions of Sec.35AD(1) and its proviso and the provisions of Sec.35AD(5)(ae) of the Act, would show that the deduction in so far as the specified business of production of fertilizer in India, is concerned, the production of fertilizer should be in a new plant. If production of fertilizer is an existing plant then such production should be in a newly installed capacity. Therefore if one reads the word “in a new plant” occurring in the first part of Sec.35AD(5) (ae) with the other part, viz., “in a newly installed capacity in an existing plant”, it would be clear that what is contemplated by the statutory provisions is that the new plant should be new and not an existing plant. It is undisputed that the Assessee’s plant for production of fertilizer is an existing plant. Therefore the only way by why the Assessee can claim benefit of deduction u/s.35AD of the Act is by establishing that in its already existing plant it produced fertilizer in a newly installed capacity. 25. It was argued by the learned counsel for the Assessee that captive power plant is an integral part in production of fertiliser. The meaning of word "plant" ought not be restricted to main plants which ITA Nos.2921 & 2922/Bang/2018 Page 19 of 24 produces fertilisers alone. It will also include those support plants which are integral to the entire manufacturing process of fertiliser. Thus, the captive power plant ought to be treated as "plant for production of fertiliser". The AO has allowed normal depreciation on the captive power plant and therefore it is not disputed that the captive power plant was integral part of the plant for production of fertilizer. We may however add that the role of CPP was only to supply natural gas as a feed stock for manufacture of fertiliser and natural gas for generating power through the CPP. Admitted position is that the production of fertilizer is not complete with these two processes alone and there are many other processes that need to be completed before production of fertilizer. In this context it would therefore be necessary to examine whether the CPP can be said to be new plant for production of fertilizer, so as to qualify as "new plant" for claiming deduction u/s. 35AD of the Act? The argument of the learned counsel for the Assessee on this aspect however has been evasive in the sense that he relies on the circumstance that the lower authorities have not disputed that the captive power plant in question, is not a new plant. The learned counsel has further submitted that the existing Captive Power plant was replaced in the subject financial year by importing and installing 3 new Dual Fuel (Natural Gas + Heavy Fuel Oil) DG sets each of 8.7 MW capacity. Further. in the financial year 2013-14 and 2014-15 relevant to the assessment year 2014-15 and 2015- 16 respectively, the Assessee installed 1 new DG set and 2 new DG sets respectively. The old DG gensets were discarded. Therefore, the ITA Nos.2921 & 2922/Bang/2018 Page 20 of 24 installations of new gensets in the captive power plant would amount to new plant". 26. As we have already observed, “a new plant” contemplated in Sec.35AD (5)(ae) is that the “new plant” should be for production of fertilizer in the sense that it should be capable of producing fertilizer by carrying out all processes involved in production of fertilizer, which admittedly in this case is absent in the sense only the process of power generation for production of fertilizer is met by installation of CPP. This is the only interpretation one can give to the expression “a new plant” given in the first part of Sec.35AD(5)(ae) when read in contradistinction to the second part of Sec.35AD(5)(ae) which refers to an “newly installed capacity in an existing plant for production of fertilizer”. Moreover Sec.35AD(1) proviso refers to commencement of operations of the specified business. The Assessee was already producing fertilizer even prior to and after installation of CPP. Therefore the intention behind the provisions of Sec.35AD(5)(ae) of the Act, cannot be broadly interpreted, as contended by the learned counsel for the Assessee, so as to cover a case of installation of CPP for uninterrupted power by use of a different input i.e., natural gas as a new plant for production of fertilizer. If one keeps in mind the object behind introduction of the provisions of Sec.35AD as explained in the Circular referred to above, viz., investment linked deduction, the interpretation sought to be canvassed by the learned counsel for the Assessee will make the very purpose for which the section was introduced, meaningless. The interpretation sought to be canvassed on ITA Nos.2921 & 2922/Bang/2018 Page 21 of 24 behalf of the Assessee, if accepted, would mean that any addition to plant and machinery, for whatever valid reasons, should be allowed deduction of 150% u/s.35AD of the Act. We therefore reject the prayer of the Assessee for deduction as “a new Plant” for production of fertilizer. We have not elaborated on the length arguments raised by the learned counsel for the Assessee on this aspect, as those arguments in our view are not germane to the issue before us. 27. The next argument raised on behalf of the Assessee is the argument that in the second part of Sec.35AD(5)(ae) the Assessee is entitled to claim deduction i.e., “in a newly installed capacity in an existing plant for production of fertilizer”. The learned counsel for the Assessee submitted that the term "newly installed capacity" would also include the capacity newly created to operate the plant with the use of natural gas as feedstock. The capacity was created for the first time as a result of the capital expenditure incurred aforesaid. It was submitted that the existing Captive Power plant had 6 single fuel (HFO) based DG sets each of 6 MW generation capacity, with aggregating capacity of Captive power plant at 48 MW. In the financial year 2012-13 to 2014-15, "8 single fuel DG sets" were replaced with "6 new Dual Fuel" (Natural Gas + Heavy Fuel Oil) DG sets each of 8.7 MW capacity were installed. Thus, the new capacity to produce power was created by installation of dual fuel DG sets. The heat rate in the Gas operation is 2150 kcal/kWh as against 2200 kcal/kWh in HFO operation. Also, the CO2 emission is reduced from 0.7 kg/kWh to 0.5 kg/kWh (from about 182,000 t/a to about 130,000 t/a), thus reducing greenhouse gas ITA Nos.2921 & 2922/Bang/2018 Page 22 of 24 emission. In the present case, the capital expenditure has been incurred for installation of new gensets in the captive power plant. The newly installed gensets can use dual feedstock i.e. natural gas or furnace oil. for generation of power. The former captive power plant could only be run on furnace oil as feedstock. Thus, by installing new gensets, the Assessee has created a new capacity in its captive power plant to generate power with the use of natural gas. The installation of new DG sets was mandated by the Govt. of India [GoI]. Had the Assessee not complied with the mandatory requirement issued by the GoI, then it would have been ineligible to claim subsidies from the GoI and consequently, leading to closure of business. As a matter of fact, when the entire plant was equipped to run on natural gas with the help of installation of new plant and machineries, the Assessee could not run the plant on account of non-availability of natural gas. This led to closure of plant in the period October 1, 2014 to January 7, 2015. Though the GoI allowed the Assessee to run its plant on naphtha and furnace oil until natural gas is made available, but it shows that the installation of new plant and machineries was inevitable for the Assessee to remain viable in the business of production of fertiliser. Thus, by installing the new plant and machineries, the Assessee has created new capacity of running its plants on dual feedstock. 28. On the above arguments, we fully agree with the following conclusion of the revenue authorities only. As rightly held by the revenue authorities, the relevant clause mentions words "newly installed" capacity which means that there should be extension to the ITA Nos.2921 & 2922/Bang/2018 Page 23 of 24 installed capacity and simultaneously there should be significant increase in the capacity which was existing hitherto. The AO in this regard, has categorically found / noted that, in the instant case there was no such scenario as the installed capacity of assessee's Urea operation is Rs.3,79,500 metric tonnes during the year as well as during the earlier years as also in the subsequent years. It is therefore apparent that there is nothing new which is installed by the assessee, so as to cause any major capacity-enhancement, during the period under consideration. We also agree with the argument of the AO that if the installed capacity of an entity is 'x' metric tonnes but by introduction of a new plant it has extended the capacity to `x + y' metric tonnes then the extra production out of additional 'y' metric tonnes can be treated as new but if someone tries to show the old 'x' as (x/2)+(x/2) metric tonnes then it is nothing but splitting. The AO has highlighted that, in the instant case there is no increase in capacity and the old capacity continued. The assessee's alternate argument on basis of capacity enhancement is therefore not acceptable. 29. In view of the above conclusion, we do not wish to go into the other arguments raised by the Assessee on satisfaction of other conditions necessary for claiming deduction u/s.35AD of the Act, because the Assessee in any event cannot get the benefit of deduction u/s.35AD of the Act for non-fulfilment of condition mentioned in Sec.35AD(5)(ae) of the Act. ITA Nos.2921 & 2922/Bang/2018 Page 24 of 24 30. In the result, both the appeals of the Assessee are dismissed. Pronounced in the open court on this 28 th day of June, 2022.. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 28 th June, 2022. / Desai S Murthy / Copy to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar, ITAT, Bangalore.