Income Tax Appellate Tribunal - Mumbai
Tata Power Co. Ltd. vs Deputy Commissioner Of Income Tax. ... on 11 July, 1997
Equivalent citations: [1998]66ITD321(MUM)
ORDER
H. C. Srivastava, A.M.
1. As all the above appeals concern the same group of assessees and involve more or less similar points, they are being disposed of together for sake of convenience.
2. The ground of appeal No. 1 in all the three appeals is the same.
3. All the three assessees are assessees who deal in generation and distribution of electricity through various units. Some of the units are not permitted to use coal. While one unit is operating mostly on gas since 1979, unit No. 5 was commissioned during the previous year to this assessment year. Ash is generated as residual waste due to burning of coal and this ash is required to be disposed of in the normal course of the assessee's business. The generation cost of the electricity not only includes the fuel and other incidental costs, but also the cost for disposal of the ash and other residual products due to burning of coal. Thus the ash so produced is required to be disposed of in the normal course of the appellant's business. As the expenses incurred on disposal of the ash pertain to the cost of the electricity so generated, it is a sort of direct expenditure to the assessees. Every assessee who generates electricity, transmits and distributes the same, is expected to make all arrangements for disposal of the ash so created out of this activity. The assessees in this case has a project under which a plant is erected where the ash so collected is put in and the sea water is pumped in it to convert the same into a slurry and thereby convert it into a semi-liquid fluid, so that the same flows at a certain designated place and is disposed of without harming the environment. There are very stringent anti-pollution laws operating in this regard. The ash so converted into a slurry and transported through pipes has to be disposed off in such a way that it does not in anyway escape into nearby areas and harm the environment. Any violation of any such stringent law can result into cancellation of the licences to do business in generation of the electricity. In the case of this group of companies, the ash is to be disposed of in a manner which does not cause pollution and for this purpose the Bombay Municipal authorities continue visiting the area and see to it that the rules are followed. Thus, the assessee in this connection had to make necessary arrangements for the disposal of the ash in such a manner that the same was confined within a well-defined area and does not escape to the sea. The assessee purchased a reasonably large piece of marshy land between the main land and the Bombay group of islands to enable them to dispose of the fly ash in the approved manner. According to the assessees, this slurry was taken to different parts of this marshy land and the same was used to fill the pits and see to it that the same does not escape to the sea. Therefore, the activity of the ash disposal has to be made fool-proof. According to the assessees, once a particular pit or area is filled with the ash, then boulders have to be put in there and murrum is used to be put on the same so as to convert that area into a green belt, in accordance with the directions of the Maharashtra Anti-Pollution Board. Once a particular area is filled with the slurry in the manner described above, then another part of the land is used to dispose of the fly ash. Wit a view to prevent any escape of the ash or the mixture containing the ash to the sea, bunds and dykes have to be constructed and murrum has to be put on the top of them. According to the assessees, the units of these assessees are located on a land which is abutting the sea and is marshy land. It was only because the assessees owned the marshy land, into which the ash generated could be disposed of, that any permission to put up a new unit was granted by the authorities concerned. With the passing of time, some of the units had to be dismantled and new units had to be brought in. Because the assessees had to build a new manufacturing unit in an area adjacent to the marshy land so as to enable it to dispose of the future generation of ash into a slurry, it was permitted to use the land which was made out of the ash which was used to fill in the pits. According to the AO, however, the activity of ash disposal stops at the stage where the fly ash, soot and bottom ash are carried in the form of a slurry using sea water jet pumps to the adjoining or to disposal area which was dyked so that ash slurry is contained within the marshy land. The AO was of the opinion that the activity of ash disposal stopped there and the expenditure incurred till that stage has to be allowed as a revenue expenditure and was as such allowed in the past. All the activities by the assessee after this stage were done with a view to reclaim the land. Thus, according to him, after the first activity all other activities, viz. putting of murrum, providing bunds, planting trees and putting boulders, etc. form integral part of land reclamation work. Thus, the AO was of the opinion that the major activity of the assessees in this regard was with a view to create a new piece of land which could be used by this assessee for its other activities. According to the AO therefore, once the first stage is over, all the other expenses incurred after that have to be treated as expenses of capital nature incurred in connection with the recovery of land. This activity, according to the AO, therefore, results into creation of a capital asset and as such is capital expenditure. He, therefore, proceeded to disallow such expenses in all the three cases. The case of the Department is that the land reclamation is the primary purpose of the expenses and the ash disposal is only incidental and that the process of disposal of ash ends when it is thrown into open land adjacent to the power station and thereafter the expenditure on putting on murrum of good quality to obtain Bombay soil density and to have bulldozer operation including removal of boulders which create hurdle in subsequent piling for construction and creation of huge bund at substantial costs including separate expenses also on bunds, come under land reclamation activity on a land which belongs to the assessee himself and, therefore, is a capital expenditure on which depreciation is also not allowable being part of the cost of the land on which later on two units were constructed. The contention of the assessee was that the entire expenditure was to meet the requirement of Pollution Control authorities and the disposal of ash which is the primary objective. The reclamation of land is only an outcome of the earlier activities carried on with a view to dispose of the ash. The assessee submitted that under the Anti-Pollution Regulation and the directions of the electricity authorities, it has to keep the land free and not to use the same for any purpose other than approved by the Anti-Pollution Board. The AO was, however, of the opinion that the entire area adjacent to the Trombay unit belongs to the assessee and being the company in priority sector they are always in a position to assume that they will get sanction for setting up of another unit of electricity as the same is always in short supply. He, therefore, disallowed such expenses and the same were confirmed by the first appellate authority in all the three cases. Penalty proceedings under s. 271(1)(c) were initiated, as the AO was of the opinion that the assessee concealed the real nature of expenses incurred, he imposed penalties in all the three cases. However, the penalties were cancelled by the first appellate authority and her orders were upheld by the Tribunal. Before us the appeals are with regard to the disallowance of expenses as capital expenditure.
4. Before we proceed to bring out the arguments put forth by the assessee's counsel and the Departmental Representative, it would be better to bring out some more facts in this case. The assessee purchased 88 acres of land in Trombay in 1953 and 232 acres of land in 1978 at the rate of Rs. 4 per sq. mt. As far as the 1978 transactions were concerned, acquisition proceedings were initiated by the IT Department as according to the Department the price paid was ridiculously low. However, the acquisition proceedings were dropped on the ground that the land was so much low lying in comparison to the sea level that 27.30 crores cubic feet of murrum would be required to be filled in, costing Rs. 19.79 crores to make the land usable for constructing a power house.
It was found, if this much of expenditure has to be incurred, the rate will go up to Rs. 222 per sq. mt. The Department was of the opinion that the ash disposal is part of the manufacturing process of electricity itself and, therefore, the same is taken even towards the cost of the fuel. According to the Department, once the above activity is over the other activities are done with a view to reclaim the unusable land by putting boulders, levelling the same, putting murrum, again levelling the same by bulldozers and planting trees. The land so reclaimed is then used at a convenient time to build another generating plant. Thus the purpose behind all this activity is to get the reclaimed land which is a non-depreciable capital asset. According to the AO, the expenditure in question is more on land reclamation primarily rather than on ash disposal and in other cases of similar type of electric companies there are hardly any expenses separately on ash disposal. He, however, capitalised the cost of machinery for handling the ash disposal and allowed the depreciation. According to the AO, the very fact that the assessee did not sell any fly ash but used the same for filling the pits proved that the assessee was interested in using the fly ash along with murrum and boulders with a view to reclaim the land for construction of another unit.
5. The AO brought out instances from three other electricity generating cases to submit that the assessee has been scientifically and consistently right from the beginning started reclaiming the land and one after the other power units have been set up on the reclaimed land. Giving the instances in the case of Andhra Valley Power Supply Co. Ltd., he indicated that Rs. 86.25 lakhs were shown as expenditure on earth buttressing of rock bunds. He similarly brought out details in Tata Power Co. Ltd. According to him, out of Rs. 86.25 lakhs and Rs. 60.54 lakhs were incurred on murrum filling.
The land in which the disposal of the ash is made is the land owned by the assessee and not by anybody else. The AO visited the sites and came to a conclusion that it was a case of land reclamation and ash disposal was only incidental to the whole process. He held that an expenditure of about Rs. 20 crores was estimated to fill in the entire land and thus right from the beginning the assessees intention was to reclaim the land. He found that new units were constructed on piles which were about 11 mts. deep in the land. As the land is contiguous only to the property to the Tata Electric Companies, only Tata Electric Companies could have made use of this property. The map prepared by the land department of Tata Electric Companies also show these lands as Tata's land for future development for ancillaries to the existing user. As the expenditure on earth filling which required a bund, is an improvement of capital asset and was incurred for making the land usable for the purposes of business, this according to the AO was also a capital expenditure. The AO further proceeded to analyse the quantum of coal burnt by the different units and tried to compare the same with the total murrum used in this regard. Multiplying the cubic meter by the density of 1,800 per kg. per cubic metre, he found that the cost of extra material and bund removal was more at Rs. 75 per cubic metre as against murrum filling at Rs. 35.50 per cubic metre. He found that to dispose of only 442 tonnes of ash the companies have used more than 7 lakhs tonnes of murrum and this proved that the primary purpose was land reclamation rather than ash disposal. According to him, though the land was marked as No Development Zone, since these companies were governed by the Electricity Act, they have the privilege for acquiring the land for public purposes and, therefore, the assessee right from the beginning knew that it would be in a position to gain maximum benefit on this account.
The assessee group of companies in their application dt. 16th September, 1974, for which consent was given on 19th October, 1976, mentioned to Maharashtra Prevention of Water Pollution Board that the method of disposal of rejected materials was mixing the same with sea water and use the same for land reclamation. He further examined the supplier of murrum, one Mr. Harish Lakhani, who stated that the murrum was supplied for the purpose of land reclamation. However, it is noted that Mr. Harish Lakhani was not an expert in this regard and also the assessee was never given any right to cross-examine him. The AO also relied upon the Schedule A of the tender letter dt. 30th of June, 1984 to hold that right from the very beginning the assessee wanted contractors who could do the fillings in a way that the same resulted in reclamation of land. He also made enquiries from the Bombay Municipal Corporation and found that as per terms and conditions for Unit No. 5, the low lying land shall be filled up to a reduced level of atleast 80.5 mts. of good quality murrum, earth boulders, etc. According to the AO, Units No. 5 and 6 could not have come up on the low-lying seashore but for such filling done in scientific manner right from the beginning. He also examined the work contracts and found that not even there is a mention as to how the ash disposal was to be taken care of. He examined various contracts in support of the above conclusion. He also obtained information from other thermal power stations and found that there was no costs of such ash disposal in case of Bhatinda thermal station, while in Nasik the total expenditure was approximately Rs. 2.50 crores. He found that the coal consumed and ash generated in the assessee's case is much lower because mainly gas and oil has been used as fuel. Thus, according to the AO, this high expenditure proves that the same was with a view to reclaim the land and not for ash disposal.
6. Before us it was emphasised by the assessees' counsel that, but for the scientific method of disposal of ash and solidifying of the land, there would have been objections from the Pollution Control Board and the reclamation of land under such circumstances is only incidental. The counsel proceeded to submit that the expenditure on bund in a given year at a heavy cost in comparison to other years is for the reason that once it is constructed the earth filling and the ash disposal can be continued to be done for two to three years without any further construction. It was submitted that unless this careful planning was done, there was a risk of ash leaking to the sea in the long run. It was submitted that as far as electricity companies are concerned, there is no tax incidence borne by them, as the tax burden is passed on to the consumers and, therefore, there could not be any motive for wrongly classifying the capital expenditure as revenue expenditure. The counsel for the assessees further proceeded to invite our attention to the order of the Tribunal in penalty proceedings. It was submitted that during the penalty proceedings before the first appellate authority, the CIT(A) visited the site and studied the entire process of ash disposal. According to her, the process of ash disposal did not end as soon as the ash was thrown out in the ash disposal area. She refused to agree with the finding of the AO that at that stage the land reclamation process began. It was submitted that if it was the intention of the assessee to reclaim the land, then immediately after purchasing the land in 1977-78 the assessee could have started the activities in this regard. Attention was also invited to the fact that only 1/3rd of land of approximately 232 acres of marshy land had been used for ash disposal and the balance land was required for such purpose in parts upto the year 2005. It was submitted that the marshy land is allowed to be in its original condition and was only being used for development of green belt because of the control and constant monitoring by various Government agencies on account of stringent pollution control rules. Under such circumstances, the assessee had to ensure that the bunds were prepared for by using murrum and the boulders had to be removed in order to develop the green belt. It was submitted that the area presently filled up was converted into green belt by plantation of trees as per the directions of the Maharashtra Pollution Control Board. It was found that the usage of fly-ash to make cellular bricks, etc. was not feasible. Attention was invited to the letter dt. 23rd December, 1983, written by the assessee to the Central Electricity Authority, Ministry of Energy, Department of Power, New Delhi, in connection with the permission for installation of a unit. The CEA laid great emphasis on ash disposal programme before granting permission for installation of additional unit. It is to be remembered that the Bombay area has a peculiar situation where the main city is located on various islands and the area occupied by the assessee is somewhere in between the main land and the islands. Along with the letter dt. 23rd December, 1983, the assessee had given its ash disposal programme upto 2005. Even details of ash production, disposal, utilisation of marshy land etc. are given and the same is available in assessees' paper book No. 2, p. 21. It was submitted that it is quite clear that the aspect of the adequate open land for ash disposal is an important factor which goes into consideration of Government authorities before granting of permission for installation of additional unit. In the assessee's paper-book, we find a letter of the Maharashtra Water Pollution Board, giving consent under s. 23 of the Anti Pollution Act. The counsel for the assessee submitted that this letter gives an idea of stringent measures. It was submitted that the soil after land filling shall have certain specified characteristics. The solid waste in the factory premises as fly ash will have to be used for land filling only and nothing else. The assessee has no power to change or alter the quantity, quality or the mode of the disposal without previous written permission of the Board. It was, therefore, submitted that all these expenses were incurred with a view to comply with the Government authorities. Even if the companies were not to install any future additional unit, there could not have been any change in the manner or process of ash disposal. Even the plantation of trees on account of the requirement made by the State Government. Thus, it was submitted that the entire activity resulted only in revenue expenditure.
7. The Departmental Representative strongly relied on the order of the lower authorities. He submitted that right from the beginning when the assessee moved to the Central Electricity Authority and to the State Government, the intention was clear. It was to reclaim the land for the purposes of future installation of plants. It was submitted that there is no material on record to prove that, the activities taken by the assessee after converting the ash into a slurry and dropping the same in the marshy land, that the same was in continuity with the earlier activity. As a matter of fact, it was submitted that the approval given by the anti-pollution authorities clearly stated that the activity of filling the pits by ash will result in reclamation of land. It was also submitted that the assessee was entitled to get another piece of land in the Bombay Metropolitan area by surrendering this piece of land. Attention was also invited to the fact that ultimately a new power generating unit was set up on this reclaimed piece of land. This was a clear case of reclamation of land right from the very beginning. According to the Department, once the assessee dropped the slurry in the designated pits, nothing further was required to be done in furtherance of its activity for disposal. All the other activities like putting boulders, levelling the same, putting murrum, again levelling the same by bulldozers and plantation of trees are nothing but clear acts of the assessee to reclaim the land for future use as a capital asset. It was, therefore, submitted that the purpose behind all this activity was to get the reclaimed land which is a non-depreciable capital asset. It was submitted that contrary to the arguments advanced by the assessee's counsel, building of dykes and bunds was a clear attempt of the assessee to see to it that the land reclaimed by it through the use of ash and fly-ash was safeguarded and could be used for building another electricity generation plant. Attention was invited to the fact that in similar cases of Bhatinda, Panipat in Haryana and Koradi and Nasik in Maharashtra, not much expenditure was incurred by those parties in such activities. It was, therefore, submitted that right from the beginning the sole intention of the assessee was to reclaim a piece of land near the main land of Bombay, so the assessee-company does not suffer any transmission losses. The Departmental Representative further took us to the order of the lower authorities to submit that the entire expenditure was of capital nature which did not result into creation of any depreciable capital asset. It was, therefore, submitted that the order of the lower authorities should be sustained.
8. We have heard the parties. We find that on 23rd December, 1983, Mr. Chinnappa, Chairman and Managing Director of Tata Electric Companies, wrote a D.O. letter to Mr. Suri, Member (Thermal), Central Electricity Authority.
In this letter they had drawn attention to the earlier reports regarding "the actual area of land under our ownership and the area owned by the Government of India/the Bombay Port Trust which directly need fillings. Both the Government of India and the Bombay Port Trust would be glad if we could deliver them the required ash to fill their low-lying areas, as creation of borrow fill areas from Chembur hill is forbidden and transportation of fill from long distance would be prohibitively expensive". This proves that the assessee wanted to dispose of the ash for purposes other than the purposes of filling the land which was owned by the assessee group of companies. Attention has also been invited of the Electricity Authority about the usage of gas fuel. In this very letter itself a tabulation was attached to indicate that the assessee had more than adequate storage till the year 2005. They have clearly stated that they had in their possession adequate land for ash disposal till the year 2005, which in their opinion was adequate for project approval purposes even on a conservative basis. On page No. 19 of the assessees' paper-book, it has been mentioned that "with the above built-in reserves and especially adequacy of land between 20 to 25 years, CEA should not have further reservations". On page No. 22 of the assessees' paper-book, there is a letter by Maharashtra State Electricity Board to the Manager (Co-ordination), Tata Power Company Ltd. They have invited the attention to the assessee to the activity of ash disposal area at Chandrapur, Koradi, Bhusaval, Parli and Nasik. According to this letter, the ash slurry in these areas is pumped to nearby low-lying areas where it is contained in the ponds already constructed. They have invited attention to the fact that the MSEB wanted to do some dry disposal of ash, but found that the ash nuisance continued to be in the power station and adjoining areas. They also invited attention to the fact that very meagre amount of fly-ash can be sold as practically there are no buyers. In the third para of their letter in assessees' paper-book, page No. 22, it appears "we are required to create additional capacity for disposal of fly-ash once the low-lying areas in the service get filled up. At Koradi we have already increased the bund height and are now required to provide new disposal area at an estimated cost of Rs. 28 crores. Similarly, at Nasik and Bhusaval, the augmentation cost will be about Rs. 48 crores and Rs. 28 crores respectively. The water from ash pond is regularly tested so as to comply with the norms of Pollution Control Board". From this letter, it is clear that even MSEB not only built dykes and bunds, it was forced to increase their height and provide new disposal area at high amount of estimated costs. This, in our opinion, clearly disproves the AO's contention that very little expenditure was required by the units of MSEB to dispose of the fly-ash. This further brings out the fact that the ash pond was regularly tested to comply with the norms of the Pollution Control Board. Thus, from the two letters, it is obvious that it is not only the conversion of ash into a slurry that is enough for the disposal of the ash, it is also putting the same in pre-designated pits and also building of bunds and dykes to contain their further seepage into normal land. In assessee's paper-book, page No. 25, there is a letter from Maharashtra Prevention of Water Pollution Board written to this assessee. They have prescribed certain terms and conditions prescribing for separate drainage system through collection of industrial and domestic waste. Treatment and disposal of domestic effluent is also prescribed. In sub-para (b) of para 5, it is provided that the treated effluent from the factory shall be utilised for gardening. On page No. 27, it is provided that "the solid waste arising in the factory premises as fly-ash to be disposed off by land filling as is being done at present". It is further provided that neither storm water nor discharge from other premises shall be allowed to mix with the effluent from the factory. Para No. 11 prescribes that no mode of disposal of the effluent can be changed without the permission of the Board. From the above it is obvious that the assessee is bound to build bunds and dykes to prevent further seepage of the slurry into the sea. This can be done only by keeping the same in the marshy land. It is obvious that once a part of the marshy land is filled, action will have to be taken to solidify the same by having some activity like gardening, etc. carried on the same. This cannot be done unless boulders are put in, murrum is used and bulldozers are made to level the land.
9. There is another letter dt. 11th August, 1986 to the assessee group of companies from Maharashtra Pollution Control Board, which prescribes "use of coal in replacement unit will not be permitted. No fly-ash and waste generated from operation of control equipment on Unit No. 5 should be disposed of in the sea or anywhere in the BMR area". It is obvious that this could not be done unless the bunds were built and the ponds already filled were provided with the necessary obstructions. On the basis of the material brought out by us as above, there is no dispute that the purpose of the whole expenditure incurred by the assessee in connection with the ash disposal programme was only to comply with the requirements stated by the Government authorities. Whether the assessee constructed a new generating unit or not is not a relevant issue in this case. If on account of meeting with the obligations imposed by the duly constituted authorities some expenditure is incurred and the incurring of such expenditure results into a particular piece of asset, which may or may not be used in future, is not the primary issue. If however, such an asset comes into existence, it will be fool-hardy not to use the same. However, that does not mean that from the word go the assessees had decided to take up such activities with a view to reclaim a piece of land, it is notable that not even a square foot of land has been added to the land already belonging to the assessee. It is in the course of carrying out the directions of the State Government that the assessee took all the activities to dispose of the fly-ash which incidentally resulted in that area becoming capable of being used for some activities as well other than for what it was intended. It is, therefore, obvious that the activities taken up by the assessee were not for the purposes of creation of an asset, but resulted in incidental creation of some non-depreciable asset. In our opinion, therefore, the lower authorities were not justified in disallowing the expenditure as capital expenditure. The disallowance is deleted.
10. While it is possible to quote several cases decided by different High Courts and Supreme Court in this order, we are restraining from doing so, as we are of the opinion that the facts of the case are absolutely clear to have any other opinion.
11. All the other grounds of appeal are common in all the three cases. Ground of appeal No. 1 is allowed in all the three cases, as above.
12. Ground of appeal No. 2 : We find that Tribunal, Mumbai, by their order for asst. yr. 1978-79 and 1979-80 in the case of the assessee itself have decided this issue in favour of the assessees. We also find that the Bombay High Court, in assessees own case in IT Ref. No. 299 of 1987, have decided this issue in favour of the assessee. In result, all the assessees are entitled to full deduction of initial contribution to the Staff Superannuation Fund.
13. Ground of appeal No. 3 : We find that the Bombay High Court in their order in the case of CIT vs. Chase Bright Steel Ltd. (1989) 177 ITR 124 (Bom) and subsequently in the case of Century Spinning & Manufacturing Co. Ltd. vs. CIT (1991) 189 ITR 660 (Bom), have decided the issue in favour of the assessee. In view of the above, this issue is also decided in favour of all the assessee here.
14. Ground of appeal No. 4 : We find that the Honourable Supreme Court in the case of Associated Power Co. Ltd. vs. CIT (1996) 218 ITR 195 (SC), have decided this issue against the assessee. Accordingly, this issue is decided against the assessee in question.
15. In view of the above, all the appeals are allowed in part.