TaxTMI 
TaxTMI 
2026 (8) TMI 1550
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....IT(A) erred in confirming addition for deduction claimed u/s. 80IA(4) for Rs. 32,19,52,570/- when deduction has been rightly claimed by the appellant. 2. In law and in the facts and circumstances of the Appellant's case, the Ld. CIT(A) erred in holding that cost of LP Steam shall be considered as Nil when such cost cannot be considered as NIL since production of steam involves incurring of various costs. 3. The appellant craves leave to add to, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal. 3. Ground Nos. 1 and 2 are interconnected and concern the disallowance of deduction of Rs. 32,19,52,570/- claimed by the assessee under section 80-IA(4) of the Act in respect of its captive cogeneration power plant. The central dispute is whether, while computing the profit of the eligible undertaking, the assessee was justified in allocating a part of the total operating cost of the cogeneration plant to low-pressure steam supplied to its paper-manufacturing division, or whether such low-pressure steam was generated without any separate cost, as held by the CIT(A). 4. Facts of the case 4.1. The....
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....96,242/- allowable under the Income-tax Act, the profit eligible for deduction under section 80-IA was computed at Rs. 32,19,52,570/-, as under: Particulars Amount Consumption of coal Rs. 55,36,95,203/- Cost of electricity charges Rs. 60,64,548/- Cost of turbine chemicals and stores consumed Rs. 1,13,69,101/- Cost of water consumption Rs. 2,47,80,453/- Salaries and wages Rs. 1,75,36,892/- Other expenses Rs. 5,35,31,962/- Interest on working capital and term loan Rs. 3,66,81,050/- Depreciation Rs. 1,53,51,814/- Total cost Rs. 71,90,11,024/- 4.4. The AO observed that if the total cost of Rs. 71,90,11,024/- was set off against the revenue from electricity generation of Rs. 69,41,23,907/-, the eligible unit would incur a loss of Rs. 2,48,87,117/-. The AO, therefore, issued a notice dated 09.03.2021 requiring the assessee to explain, with supporting evidence, the basis on which the cost of low-pressure steam had been excluded from the cost of electricity generation and the profit eligible for deduction had been computed at Rs. 32,19,52,570/-. 4.5. In its reply dated 15.03.2021, the assessee explained that Unit V was a cap....
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....attributable to electricity generation Rs.33,92,26,908/- 4.7. The assessee submitted that the quantity of low-pressure steam was recorded through meters installed in the cogeneration plant and the readings were maintained in a physical logbook. It was further submitted that the working of the eligible profit and the allocation of the cost between high-pressure and low-pressure steam formed part of the report in Form No.10CCB certified by an independent Chartered Accountant. According to the assessee, the total cost of Rs. 71,90,11,024/-included the cost incurred in generating both outputs of the cogeneration plant and, therefore, the proportionate cost of Rs. 37,97,84,115/- pertaining to low-pressure steam consumed by the paper division was required to be borne by that division. 4.8. The AO did not accept the explanation. He observed that the assessee had reduced the cost attributed to low-pressure steam from the expenses of the power-generation unit, thereby converting the loss of Rs. 2,48,87,117/- into a book profit of Rs. 35,48,96,998/-. According to the AO, the assessee had not furnished sufficient evidence supporting the cost attributed to low-pressure steam. The AO f....
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....neration plant, and the cost break-up furnished during the assessment proceedings. It was submitted that the total generation of 5,69,735 metric tonnes of steam and the use of 3,00,936 metric tonnes as low-pressure steam by the paper division were verifiable from the contemporaneous records. 9. The assessee further submitted that even if the cost of low-pressure steam was not reduced from the expenditure of the eligible undertaking but was instead shown as the value of steam transferred to the paper division, there would be no change in the profit of the eligible undertaking. According to the assessee, the accounting presentation could not alter the commercial result because the proportionate value of low-pressure steam was required either to be reduced from the total common cost or to be recognised as the value of the output transferred to the paper division. 10. The assessee also addressed the AO's observation regarding the absence of a separate profit and loss account for low-pressure steam. It was submitted that separate books were maintained for Unit V and that its accounts contained the entire expenditure incurred by the cogeneration plant. Since electricity and steam a....
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.... the cost attributed by the assessee to low-pressure steam, the eligible undertaking had incurred a loss of Rs. 2,48,87,117/-. He accordingly upheld the disallowance of deduction of Rs. 32,19,52,570/- claimed under section 80-IA(4) and dismissed the grounds raised by the assessee on this issue. 15. Aggrieved by the decision of CIT(A), the assessee is in further appeal before us. The Authorised Representative (AR) of the assessee reiterated the facts and submitted that the issue is covered by the consolidated order dated 05.07.2021 of the Surat Bench of the Tribunal in the assessee's own case for A.Ys. 2007-08 to 2013-14 in ITA Nos. 14, 15, 16, 1302 and 1303/Ahd/2016, particularly paragraphs 61 to 63. 16. By way of written submission, the AR contended that high-pressure steam and low-pressure steam represent the same continuous stream at different stages of the integrated cogeneration process. High-pressure steam rotates the turbine and, after surrendering part of its energy for electricity generation, is extracted at a lower pressure and supplied to the paper division.The AR submitted that the official website of the assessee is relied upon to establish that the cogeneration ....
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....ot render it valueless. Reliance was also placed on section 80-IA(8) of the Act to contend that the transfer of goods or services from an eligible business to another business of the assessee was required to be recognised at market value. The assessee had adopted only the proportionate actual cost of the steam without adding any profit element and had thus followed a conservative method. Neither the AO nor the CIT(A) determined any alternative market value, brought any comparable price on record or demonstrated that the amount adopted by the assessee exceeded the market value. 21. The learned AR placed reliance on the decision of the Hon'ble Gujarat High Court in Principal Commissioner of Income-tax v. Jay Chemical Industries Ltd. [2020] 120 taxmann.com 315 (Gujarat), for the proposition that the expression "power" in section 80-IA is to be understood as energy in its various forms and that steam constitutes power for the purposes of the deduction under that section. It was submitted that both electricity and useful steam were eligible outputs of Unit V and the cost attributable to low-pressure steam could not be ignored while determining the profit of that undertaking. 2....
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....rate accounts and the Chartered Accountant's certification were stated to be contemporaneous and mutually reconcilable. It was thus submitted that the plant-specific evidence could not be rejected on the basis of a general assumption that low-pressure steam had no cost. 26. In support of the contention that steam is a commercially valuable form of power and cannot be assigned nil cost, reliance was also placed on the decisions in DCIT v. DCM Shriram Ltd. [2025] 176 taxmann.com 51 (Delhi Tribunal), KR Pulp & Papers Ltd. in ITA No.755/Del/2022, Tata Chemicals Ltd. in ITA No.3093/Mum/2023, DCIT v. Vishal Fabrics Ltd. [2022] 139 taxmann.com 30 (Ahmedabad Tribunal) and ACIT v. Nandan Denim Ltd. [2023] 156 taxmann.com 287 (Ahmedabad Tribunal). In particular, it was submitted that DCM Shriram Ltd. recognised steam as a valuable source of power having a cost of production and upheld its transfer by the eligible unit to the non-eligible unit at the cost of production. The decisions in Vishal Fabrics Ltd. and Nandan Denim Ltd. were relied upon to submit that electricity and steam generated by a captive power plant and supplied to a manufacturing division are measurable outputs carryin....
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....arned DR thus submitted that the scientific process did not support the allocation adopted by the assessee and that the AO had correctly disallowed the deduction, which was rightly upheld by the CIT(A). 30. We have considered the rival submissions and perused the material placed on record, including the orders of the authorities below, the audited accounts of the eligible undertaking, the quantitative records, the certification furnished in support of the deduction under section 80-IA and the judicial precedents relied upon by the learned AR. We have also carefully examined the order dated 05.07.2021 passed by the coordinate bench in the assessee's own case for assessment years 2007-08 to 2013-14. Since Ground Nos.1 and 2 arise from the same controversy concerning the cost and value of low-pressure steam generated by Unit V, they are adjudicated together. 31. The controversy requires consideration at four levels. First, the actual process carried on in the cogeneration plant has to be ascertained. Secondly, it has to be examined whether low-pressure steam can be regarded as having nil cost merely because no additional fuel is consumed after its extraction from the turbine. Th....
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....tion. It is a useful thermal-energy output obtained by sacrificing part of the electricity that could otherwise have been generated. Consequently, the lower electricity generation of an extraction-condensing turbine, when compared with a purely condensing turbine handling the same quantity of steam, cannot by itself be treated as an accounting anomaly. It is an inherent consequence of simultaneously producing electricity and useful process steam. 36. The principal reasoning adopted by the learned CIT(A) is that once high-pressure steam is used for generating electricity, the resulting low-pressure steam emerges without incurring any further expenditure and is, therefore, a by-product having nil cost. In our considered view, this reasoning confuses the absence of additional or incremental expenditure after extraction with the absence of attributable cost. 37. The cost incurred in producing steam includes, inter alia, the cost of fuel, water and water treatment, boiler operation, labour, repairs and maintenance, depreciation, auxiliary power consumption and other operating expenditure. These costs are incurred before and during the integrated process which produces electricity ....
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....y way of illustration, that for June 2017 the physical records reflected total steam of approximately 45,201 MT and low-pressure steam of approximately 22,607 MT, which substantially corresponded with the figures reported in the certified statement. 43. Neither the AO nor the learned CIT(A) has identified any specific defect in: i. the total expenditure of Rs. 71,90,11,024/-; ii. the quantity of total steam generated; iii. the quantity of low-pressure steam transferred; iv. the meter or totaliser readings; v. the physical logbooks; vi. the monthly reconciliation; vii. the arithmetical calculation; or viii. the professional certification furnished by the assessee. 44. No plant inspection report, manufacturer's specification, technical expert opinion or alternative engineering computation has been brought on record to demonstrate that the process explained by the assessee or the recorded quantities were incorrect. In the absence of any identified defect, the entire evidentiary basis furnished by the assessee could not be rejected merely on a general assumption that low-pressure steam emerges without cost. ....
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....rket value of such goods or services as on the date of transfer. 50. Low-pressure steam is a measurable and useful form of thermal energy transferred by Unit V to the paper division. The transaction, therefore, falls for examination under section 80-IA(8). The statutory inquiry is not whether the transferred steam can be completely ignored, but whether the consideration recorded in the accounts corresponds to its market value. 51. The assessee adopted only the attributed cost of the steam and did not add any profit element. The AO and the learned CIT(A) did not determine any alternative market value. They did not produce a comparable price, establish that the amount adopted by the assessee exceeded market value or invoke the proviso to section 80-IA(8) for computation of the profit on some other reasonable basis owing to exceptional difficulty in determining market value. 52. Once the statute requires recognition of the inter-unit transfer at market value, assigning nil value to an admittedly useful and measurable transfer cannot be sustained without cogent material. The authorities below could not bypass the statutory inquiry regarding market value and recast the eligible....
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....same. In both units, high-pressure steam is generated in the boiler, supplied to an extraction-condensing turbine for generation of electricity and thereafter extracted or released at a lower pressure for use in the paper division. 57. The Revenue has not demonstrated any material change in the cogeneration process, the relevant accounting principle or the governing statutory provision. The dispute also remains substantially identical, namely, whether the accounts of the eligible undertaking can be recast by disregarding the cost or value attributable to useful low-pressure steam. 58. In fact, the order under appeal proceeds on a footing more adverse than the method rejected in the earlier proceedings. In the earlier years, the controversy concerned the appropriate allocation or reallocation of cost between electricity and low-pressure steam. In the present year, the learned CIT(A) has assigned nil cost to the steam and loaded the entire common cost upon electricity. Once the earlier order has rejected the Revenue's authority to recast the eligible unit's accounts without establishing that the value assigned to steam was not its market value, the present nil-cost treatment ca....
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....resaid decision supports the principle that a commercially useful steam output cannot be assigned nil cost merely by describing it as a by-product. The decision also recognises that there are accepted cost-accounting methods for determining the cost of steam and that the common generation cost does not disappear merely because the steam is transferred after performing part of its function in the generation process. 64. The decisions relied upon in KR Pulp & Papers Ltd., ITA No.755/Del/2022; DCIT v. Vishal Fabrics Ltd., [2022] 139 taxmann.com 30 (Ahmedabad Tribunal); and ACIT v. Nandan Denim Ltd., [2023] 156 taxmann.com 287 (Ahmedabad Tribunal), also recognise that electricity and steam generated by a captive or cogeneration plant are measurable outputs capable of carrying an ascertainable transfer value. These decisions reinforce the broader principle that the dispute may concern the method or quantum of valuation, but useful steam cannot be treated as having no cost or value at all. 65. However, the valuation method accepted in another case cannot automatically determine the exact value applicable in the present case. The factual process, pressure parameters, cost records an....
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....nd low-pressure steam constitute the same steam at different stages of an integrated cogeneration process; ii. Unit V produces two useful energy outputs, namely, electricity and process steam; iii. the absence of additional fuel consumption after extraction does not extinguish the common cost already embedded in the low-pressure steam; iv. the low-pressure steam is measurable, commercially useful and actually transferred to the paper division; v. the assessee supported the cost and quantity of such steam through meters, logbooks, separate accounts and professional certification; vi. no specific defect in those records or computations was identified by the authorities below; vii. the AO did not determine an alternative market value or invoke the proviso to section 80-IA(8); viii. the loss of Rs. 2,48,87,117/- arose because only electricity revenue was recognised while the entire common cost of both outputs was charged against it; ix. the nil-cost theory is inconsistent with the cogeneration process, cost-accounting principles and section 80-IA(8); and x. the issue is substantially covered in favour of t....