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2015 (7) TMI 935 - ITAT CHENNAI

2015 (7) TMI 935 - ITAT CHENNAI - TMI - Deduction claimed u/s.80IA on turbine division denied - assessee company was engaged in manufacture of paper and production of electricity from windmills 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 - Held that:- The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is al .....

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r the assessment year 2009-2010.

The new unit had power as the main product 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 s .....

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dertaking. 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. - Decided in favour of assessee. - I.T.A. No. 633/Mds/2014 - Dated:- 24-7-2015 - Shri Chandra Poojari & Shri Challa Nagendra Prasad, JJ. For the Petitioner : Shri. A .....

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lly 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 F .....

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deduction u/s 80lA of the IT Act. The company valued the power thus claimed to be produced from steam at ₹ 96,57,543/- (@ ₹ 3.5 per unit) and charged the same to the 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/- & .....

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sing 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 re .....

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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 t .....

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s, 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 a .....

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struction 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 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 r .....

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m 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, .....

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nery 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 .....

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y. 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 s .....

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owed the claim of the assessee u/s. 80IA of the Act. Against this, the assessee is in appeal before us. 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 functio .....

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

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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 .....

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held that 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 assesseecompany, it cannot be said that the Kottayam unit was established i .....

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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 ………&hell .....

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rom the previous business cannot be conclusive to come to the conclusion that it is a reconstruction ……………………………. 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 wher .....

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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 .....

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any 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 assessi .....

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. 10CCB - Audit Report u/s 80lA dated 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 ol .....

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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 production process into a separate division squarely amounts to splitting and reconstruction of .....

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ncome 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 o .....

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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 .....

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ting 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; (b) such machinery or pl .....

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siness 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. 9. 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 .....

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ployment 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. 11. 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. 12. Further, where .....

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w plant and machinery are put up and are themselves, independently of the old unit, capable of production of goods then it can be classified as a newly established industrial undertaking. 14. 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 c .....

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nsidering 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) Whether the machines costing ₹ 1,77,39,233/- and building ₹ 36,78,188/-, which were made during .....

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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 fac .....

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n 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. 17. 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 .....

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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 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 cle .....

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