Provision of Section 80IA on inter unit and intra unit transfer

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCHES: “D” New Delhi

BEFORE SHRI I.C. SUDHIR, JM AND

SHRI J.SUDHAKAR REDDY, A.M

ITA No: 1840/Del/2009

Assessment Year: 2005-06

A N D

ITA No: 4112/Del/2010

Assessment Year : 2007-08

Dy.CIT, Co.Circle 5(1)

New Delhi

(Appellant)

Vs.

M/s Khaitan Chemicals & Fertilizers Ltd.

201, Skipper House, 62-63

Nehru Place

New Delhi 110 019

(Respondent)

ITA No: 4200/Del/2010

Assessment Year: 2007-08

Khaitan Chemicals & Fertilisers P.Ltd.

New Delhi

(Appellant)

Vs.

ACIT,

New Delhi

 (Respondent)

Department by: Ms. Shumana Sen, D.R.

Assessee by: Sh. V.K. Jain, C.A.

O R D E R

PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER

The Appeal for the AY 2005-06 is filed by the Revenue and is directed against the order of the Ld.CIT(A)-VIII, New Delhi dated 18.2.2009. Appeals for the AY 2007-08 are Cross Appeals directed against the order of the Ld.CIT(A)- VIII, New Delhi dated 30.6.2010.

2. As the issues arising in all these appeals are common, for the sake of convenience they are heard together and are disposed of by way of this common order.

3. Facts in brief:-

The assessee is a company and is engaged in the business of manufacture of fertilizers, chemicals, soya oil etc. It manufactures and sells single super phosphate, Sulphuric Acid in its three fertilizers unit situated at Nimrani (MP), Jhansi (UP) and Nimbakhera (Rajasthan) and De-oiled cake, soya oil in its Agro based unit at Ratlam (MP). The assessee also is engaged in trading activities in the above products. The assessee company is having power generation unit at Nimrani, MP, wherein it has set up a 3.2 MW turbo generating set. The assessee had claimed deduction u/s 80 IA, on 100% of the profits of its power division. It further claimed deduction u/s 80 IA at 30% of the profits on its single super phosphate and Sulphuric Acid unit. The AO denied deduction u/s 80 IA by observing as follows.

“5. To ascertain the existence of eligible business of power generation in the case of assessee company, the annual report of the company for the relevant AY was examined. As regards the details on business of the company, during the relevant period a note is given in annexure B para 2 under head ‘business organisation’ on page no.9 of the Annual report which is reproduced verbatim as under:

“The company is mainly engaged in the manufacturing of single super phosphate, (fertilizer) and edible oil. It has three plants of SSP situated at Nimrani (MP), Jhansi (UP) and Nimbahera (Rajasthan). It also has plant of soya solvent extraction plant/refinery at Ratlam (MP). The company has an extensive marketing net work to support its business activities.”

From the above, the generation of power has not been admitted to be the business of assessee company in terms of s.80 IA. The composition of sales shown in the annual report at point no.16(c ) page 31 was also examined. In the details of opening, closing stock and sales, no detail of power as product of the company is shown.

6. Unit wise profit and loss account of the company were called for during the assessment proceedings. It was seen that power generated was meant for captive consumption only and not for sale to other parties which is further corroborated by the permission letter dt. 28.10.98 of Chief Engineer (Commercial), M.P.E.B., Jabalpur, as enclosed with the form 10 CCB. The

permission letter is related to allowing installation of 3.2 MW set for generating power to be consumed by the assessee for its fertilizer plant. The relevant extracts in para (ii) of the permission letter are noted below:

“No permission for third party sale would be entertained in future also from this. 3.2MW set.”

Also in para vi, it is further specifically mentioned that:

“Captive power plant is basically meant for HT consumers own production activities and the feasibility of installation of captive power plant should not be based on sale or wheeling of power to MPEB or other HT consumers. MEPB will not involve in any type of certification/clarification required by their financiers in this regard.”

7. Now it is also pertinent to refer to the provisions of S.80IA(8) which are as under:

“Where any goods or services held for the purposes of eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purpose of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of eligible business does not correspond to the market value of such goods or services as on the date of transfer, then, for the purpose of deduction under this section, the profit and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date.”

From the reading of the section it is evident that it speaks of inter unit transfer and not intra unit transfer of goods. The emphasis is on transfer between separate eligible business of the company which is to be taken at market value.

8. From the analysis of unit wise profit and loss account, the permission letter from MPEB and Annual report of the assessee company whose relevant extracts have already been high lighted in preceding paragraphs, the assessee does not have any business of generation of power which can be construed as eligible business in terms of s.80 IA(1) read with s.80IA(8) of the Act. The power plant as per the permission letter of MPEB dt. 28.10.98 is meant for own consumption of power and it is not an agreement with the local authority for setting up an undertaking to generate power as eligible business.

9. It is also pertinent to note that in the assessee’s business of fertilizer manufacturing, steam is generated in huge quantity as a waste product which is of no tangible value. By putting the waste product to effective use in its manufacturing process, by setting up a captive power generation plant, can by no means qualify as eligible business of assessee. The permission letter of MPEB debars the assessee from sale of power to third parties and specifically mentions in para ii that no permission for third party sale would be entertained in future also from this 3.2MW set. Hence the said power generation by captive power plant cannot be considering to be satisfying the pre requisite criteria of ‘eligible business’ for claiming the benefit of deduction u/s 80IA of the Act.”

4. Aggrieved, the assessee carried the matter in appeal. The First Appellate Authority granted relief. Aggrieved the Revenue is in appeal on this issue for the AY 2005-06 on the following effective ground.

“2. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in directing AO to allow claim of deduction u/s 80 IA.

a) Ignoring that the basic contention of the AO was that the transfer of power is intra unit and not inter unit. Thus, the AO has held that power division at Nimrani (MP) is not an independent and distinct unit. This is further corroborated from the fact that separate books of accounts, balance sheet, profit and loss account were not prepared for the power division. This has been pointed out by the Auditors in the P&L a/c of power unit annexed with Form 10 CCB that the power unit has been prepared on the basis of composite books of accounts and other accounts made by the company and based on the assumption attached in Annexure K(iv). The assumptions in annexure K(iv) revealed that cost of steam transfer to power unit from the other units has been charged on estimated price @ 1.7 per unit and credit has been given to the respective unit on the basis of SA production of the respective units. Thus, the profit & loss a/c for the power unit is based on estimation and not on the actual basis.

b) As the case laws quoted by the Ld.CIT(A) not in any way support the claim of deduction u/s 80 IA in the case of intra unit transfer.

c) As the Ld.CIT(A) has not been able to bring out any material fact to establish that the transfer of power was inter unit and not intra unit. It has not been discussed as to whether the power division is an independent and distinct unit as required u/s 80 IA.

d) Since the assessee has not maintained independent books of accounts for the power division as pointed out by the auditor it is evident that the power division at Nimrani was not an independent and district unit and therefore the transfer of power was intra unit and inter unit. Therefore assessee is not eligible to claim deduction u/s 80 IA of the Act.

e) Ignoring that no 10 CCB has been filed by the asssessee for fertilizer division at any stage and power division is not an independent unit.

f) The principle of res-judicata is not applicable in income tax proceedings.”

5. For the AY 2007-08 in addition to the issue of disallowance of deduction u/s 80IA of the Act on 100% of the profits of power generating unit, the Revenue disputed the issue of treating the profits on sale of shares, as capital gains by the Ld.CIT(A) as the income treated by the AO as business income. The effective grounds of Revenue in this year are as follows.

“2. On the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in allowing the deduction u/s 80 IA of the Act of Rs.1,70,29,232/-.

2.1. The Ld.CIT(A) ignored the findings recorded by the AO and the fact that the assessee did not fulfil the conditions laid down in sub section 5 of section 80 IA of the Act.

3. On the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in treating the income from share trading as capital gains as against the business income treated by the AO.

3.1. The Ld.CIT(A) ignored the fact that the assessee indulged in trading of shares at frequent intervals.”

6. The assessee in the A.Y. 2005-06 raised the following effective grounds. 2.(a) The Ld.CIT(A) while adjudicating upon the allowability of deduction u/s 80 IA of the Act in respect of power unit of the appellant company has wrongly concluded that deduction u/s 80 IA of the Act shall be allowed after setting of brought forward losses and unabsorbed depreciation of the power unit against the eligible profits of the power unit for the AY 2007-08.

(b) The Ld.AO has concluded that the deduction u/s 80IA of the Act shall be allowed after reducing the brought forward losses/unabsorbed depreciation of the power unit from the eligible profits of the power unit for AY 2007-08 by relying on the order of the Special Bench of the Hon’ble ITAT in the case of Gold Mine Shares & Finance P.Ltd. wherein the facts were not same as that of the appellant company and has ignored the ruling of the Hon’ble Madras High Court in the case of Velayudhaswamy Spinning Mills P.Ltd. vs ACIT reported in 231 CTR 368 and Hon’ble Madras ITAT in the case of Mohan Breweries & Distilleries Ltd. Vs. ACIT 311 ITR 0346 wherein it has been held that loss or depreciation earlier to the initial AY already absorbed against the profit of other business cannot be notionally brought forward set off against the profits of the eligible business.

(c)The Ld.CIT(A) has given observation and decided the allowability of deduction u/s 80 IA on an issue which is not arising from the order of AO at all

3.(a) The Ld.A.O. has erred in making disallowance as per rule 8D. The provision of Rule 8D are not applicable for AY 2007-08 as has already been held by Hon’ble Mumbai High Court in the case of Godrej Boycee in ITA 626 of 2010 writ Petition no.758 of 2010.

(b) The Ld.CIT(A) has erred in confirming the disallowance of a sum of Rs.6,61,382/- u/s 14 A of the Act by concluding that the expenditure incurred for earning exempt income. The Ld.CIT(A) has failed to appreciate that the appellant company has not received any dividend income or any other exempt income during the year under appeal and therefore the provisions of S.14A of the Act were not attracted.

c) Without prejudice the Ld.CIT(A) while confirming the disallowance of Rs.661382/- u/s 14A of the Act has made disallowance of Rs.596507/- out of interest paid and Rs.64875/- out of indirect expenses aggregating to Rs.661382/-. The Ld.CIT(A) has failed to appreciate that the interest was paid to bank/financial institutions on term loans/working capital facilities for carrying out the business of manufacturing and sale of fertilizers, soya oil etc. and such loans cannot be used for investment in shares and therefore the disallowance u/s 14A out of interest paid is not warranted.”

7. We have heard the Ld.D.R. Ms.Shumana Sen on behalf of the Revenue and Shri VK Jain, the Ld.Counsel for the assessee at length.

8. On a careful consideration of the facts and circumstances of the case and perusal of papers on record, orders of the authorities below and various case laws cited, we hold as follows.

9. The issue whether profits from a captive plant is eligible for relief u/s 80 IA is no more res integra. The Hon’ble Madras High Court in the case of CIT, Madurai vs. Thiagarajar Mills Ltd. Kappalur (Tax appeal no. 68 to 70/2010 dt. 7.6.2010) considered the issue and decided in favour of the assessee. The substantial question of law considered by the Hon’ble High Court reads as follows:-

“Whether on the facts and in the circumstances of case, the Tribunal was right in holding that the assessee is entitled to deduction u/s 80 IA of the Act in respect of notional profits on account of power generation from its own captive power plant and utilized by itself?”

At page 9, the Hon’ble Court has held as follows:-

“In Section 80 IA(i) also no restriction has been imposed as regards the deriving of profit or gain in order to state that such profit or gain derived only through an outside source alone would make eligible for the benefits provided in the said section.

Therefore, there is no difficulty 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 end gains by working out the cost of such consumption of power in as much as the assessee is able to save to that extent which would certainly be covered by s.80 IA(1). When such will be the out come out of own consumption of the power generated and gained by the assessee by setting up its own power plant, we do not find any lack of merit in the claim of the respondent/assessee when it claimed by relying upon s.80-IA(1) of the Income Tax Act by way of deduction of the value of such units of power consumed by its own plant by way of profit and gains for the relevant assessment years.”

Thereafter at para 13, page 14 it held as follows

“13. A perusal of the above said circular would clearly show that it is also in favour of the assessee. The said Circular is very specific that in a case of captive power unit the provisions of law is also the same as in the case of the undertaking which generates and distributes the power to any other concern. Further, it is a well established principle of law that a circular can only be made in consonance with the provisions of the enactment and the same cannot be

derogatory to the purport sought to be achieved. Hence we are of the opinion that the Circular relied upon by the Ld.Counsel for the Revenue is in fact in favour of the assesses end therefore the said contention also cannot be accepted.”

10. The Hon’ble Supreme Court in CC 2717 and 2719/2011 order dt. 21.2.2011 dismissed the Special Leave Petitions against this order.

11. The Hon’ble Madras High Court in the case of TN Paper Products Ltd. Vs ACIT, 338 ITR 643 (Madras) considered a similar issue and decided the issue in favour of the assessee by following its own decision dt. 7.11.2010 in the case of Thiagaraja Mills Ltd. by rejecting the contentions of the Revenue that the expression ‘derived from’ when applied to the facts of the case of the assessee, as it is not in the business of generation of electricity and as the profits earned are only notional profits and not actual profits earned. The income is not derived from the business of the undertaking and hence the assessee is not eligible for deduction u/s 80 IA of the Act.

12. Respectfully following these decisions of the Hon’ble Madras High Court, we uphold the findings of the Ld.CIT(A) in this regard.

13. The contentions of the Ld.D.R. that it is a case of transfer of power and not sale and that the assessee is not in the business of power generation and that there is no proof that the assessee has a separate power generation unit which is not an integral part and parcel of its manufacturing plant is devoid on merit. The Ld.CIT(A) has dealt with these issues in a detailed manner. For the sake of brevity we do not extract the same. Suffice to say the Ld.CIT(A) at para 3.4.4 referred to the annual report Annexure A to the Directors’ Report and came to a conclusion that the observations of the AO cannot be said to be wholesome and are based on partial appreciation/analysis of the facts of the case. He also dealt with the objection of the AO regarding segment wise reporting by holding that the same is applicable only if the value exceeds 10% of the total value. He relied on the decision of Hon’ble Supreme Court in the case of Orient Paper Mills 176 ITR 110 and answered the question raised by the AO on inter unit and intra unit transfer of items/goods. On a fourth objection of the A.O. about the absence of agreements with the local authority, and observed that there is no such requirement under the Act. We find no infirmity in this order.

14. In the result the appeal of the Revenue is dismissed.

15. Ground no. 2 and 2.1 are on the issue of allowability of deduction u/s 80 IA on profits of the assessee from the captive power generation plant. Consistent with the view taken by us on this issue for the AY 2005-06 in ITA 1840/Del/2009, we uphold the order of the First Appellate Authority and dismiss this ground of the Revenue.

16. Ground no.3 and 3.1 are misconceived. The ground says that theLd.CIT(A) has erred in treating the income from share trading as capital gains as against business income treated by the AO. There is no such finding in the assessment order. The AO treated long term capital loss claimed by the assessee as deemed speculation loss u/s 73 of the Act.

17. On appeal the First Appellate Authority while disposing of ground no.3 at para 4.2 held as follows.

“4.2. The submissions made on behalf of the appellant company and the findings recorded by the Ld.AO have been carefully perused. On consideration, I find that the ldAO has failed to correctly appreciate the import of Explanation to section 73 of the Act. The explanation itself starts with “Where any part of the business of a company…”. Thus, the provisions of Explanation will have an applicability only in cases where the assessee is found to be engaged in the business relating to purchase and sale of shares and securities of other companies. However, in the present case there is no material to suggest that the appellant company was doing any business of purchase and sale of shares of other companies. There is also no rebuttal of the assessee’s claim that the shares in question were held by it as ‘investment’ and not as ‘stock in trade’, on long term basis. In view of the aforesaid factual position, I have no hesitation in holding that the AO was not justified in treating the loss of Rs.9451064 as speculation loss. Therefore, the AO is directed to assess the loss in question as

long term capital loss only.”

18. Thus the grounds raised are dismissed as ‘misconceived’.

19. On a careful consideration of the contentions raised in ground no.2, we find that the Ld.CIT(A) at para 3.6 page 27 held as follows:

“3.6. In view of the above, the AO is directed to allow deduction u/s 80IA of the Act to the appellant company only after setting off of brought forward losses and unabsorbed depreciation of eligible business against the eligible profit for the AY under consideration.”

20. In our considered view the assessee should not have any grievance with these directions of the Ld.CIT(A). The AO is directed to consider the decision of the Hon’ble Madras High Court in the case of Velayudhaswamy Spinning Mills P.Ltd. vs. ACIT reported in 231 CTR 368 and pass orders in accordance with law. With these directions we dispose of ground no.2 raised by the assessee.

21. Coming to ground no.3, which is against the disallowance made u/s 14A read with Rule 8D we set aside the matter to the file of the AO for fresh adjudication in line with the decision in the case Maxopp Investment Ltd. vs. CIT (2012)347 ITR 272 (Del.) wherein the Jurisdictional High Court has held as follows.

The High Court had to consider two issues:

(a) whether interest paid on funds borrowed to acquire “trading shares” is hit by s. 14A given that the profits there from are assessable to tax as “business profits” and the dividend is incidental and

(b) whether Rule 8D has retrospective operation. HELD by the Court:

(i) The argument that if the dominant and main objective of the expenditure was not the earning of ‘exempt’ income then, the expenditure cannot be disallowed u/s 14A is not acceptable. The expression “in relation to” cannot be given a narrow meaning and simply means “in connection with” or “pertaining to”. If the expenditure has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the Act;

(ii) The expression “expenditure incurred” in s. 14A refers to actual expenditure and not to some imagined expenditure. If no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s 14A (Hero Cycles Ltd.323 ITR 518 referred).

(iii) The AO cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that he is not satisfied with the correctness of the claim of the assessee. This is a condition precedent. While rejecting the claim of the assessee with regard to the expenditure or no expenditure in relation to exempt income, the AO will have to indicate cogent reasons for the same;

(iv) Rule 8D comes into play only when the AO records a finding that he is not satisfied with the assessee’s method. Though s. 14A(2) & (3) were inserted w.e.f. 1.4.1962, Rule 8D was inserted on 24.03.2008. Accordingly, Rule 8D would operate prospectively. (Godrej and Boyce Mfg. Co.Ltd. 328 ITR 81 (Bom) followed);

(v) For periods prior to Rule 8D, the AO will have to adopt a reasonable method on the basis of objective criteria to determine the expenditure. However, here also, he will have to show why he is not satisfied with the correctness of the assessee’s claim (argument that Rule 8D exceeds the mandate of s. 14A left open).

19. In the result this ground of the assessee is allowed for statistical purposes.

20. In the result, Revenue’s appeal for the AY 2005-06 is dismissed. Revenue’s appeal for AY 2007-08 is dismissed. Assessee’s appeal for AY 2007- 08 is allowed for statistical purposes.

Order pronounced in the Open Court on 24th May, 2013.

Sd/- Sd/-

(I.C.SUDHIR) (J.SUDHAKAR REDDY)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: the 24th May, 2013

*manga

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