N. R. Agarwal Industries Limited Vs NFAC (ITAT Mumbai)
Mumbai ITAT: Low-Pressure Steam Is Not a Nil-Cost By-Product – ₹32.20 Crore Section 80-IA Deduction Allowed to Captive Cogeneration Power Plant
The Mumbai ITAT allowed the assessee’s claim of ₹32.19 crore deduction under Section 80-IA(4) in respect of its 15 MW captive cogeneration power plant. The dispute centred on whether part of the common operating cost could be attributed to low-pressure (LP) steam supplied to the paper-manufacturing division, or whether LP steam should be regarded as a by-product generated at nil cost.
The assessee’s cogeneration unit simultaneously produced electricity and useful steam. Out of total operating cost of ₹71.90 crore, it attributed ₹37.98 crore to LP steam supplied to the paper division and the balance to electricity generation. On this basis, it claimed deduction of ₹32.19 crore under Section 80-IA. The AO, however, charged the entire ₹71.90 crore cost against electricity revenue of ₹69.41 crore, arrived at a loss of ₹2.49 crore and consequently denied the deduction.
The Tribunal explained that high-pressure and low-pressure steam are not two independently manufactured products but the same steam at different pressure and energy stages of one continuous cogeneration process. Importantly, LP steam extracted for use by the paper division retains commercially useful thermal energy; its extraction also sacrifices electricity that could otherwise have been generated.
The Tribunal rejected the CIT(A)’s theory that because no additional fuel is consumed after extraction, LP steam has no cost. The absence of incremental expenditure cannot be equated with absence of attributable common cost. Fuel, water treatment, boiler operations, labour, repairs, depreciation and other expenditure have already been incurred in producing the steam.
Further, LP steam was measurable, commercially useful and actually transferred to the paper division. Therefore, Section 80-IA(8) required the inter-unit transfer to be recognised at market value. The AO/CIT(A) neither determined an alternative market value nor produced comparable prices or demonstrated that the assessee’s adopted value exceeded market value. Consequently, they could not simply assign nil value to the steam.
The Tribunal also found that the assessee’s computation was supported by meter/totaliser readings, physical logbooks, monthly reconciliation and professional certification, and the authorities had not identified any specific defect in these records or calculations.
Significantly, whether the assessee reduced ₹37.98 crore from common costs or instead retained the entire cost and credited ₹37.98 crore as inter-unit revenue for LP steam, the resulting profit remained the same. Thus, the AO’s alleged loss arose from recognising only electricity revenue while loading upon it the entire common cost of producing both electricity and steam.
The Tribunal also followed the coordinate Bench decision in the assessee’s own case for AYs 2007-08 to 2013-14, where similar reallocation of costs between HP and LP steam had already been rejected.
However, the ITAT clarified that its ruling does not mean ₹1,262 per MT is necessarily the only scientifically correct method for valuing LP steam in every cogeneration plant. Its conclusion was based on the particular facts because the Revenue had neither demonstrated any defect in the assessee’s computation nor established an alternative market value.
Accordingly, the ITAT directed the AO to accept the profits disclosed in the separately maintained and audited accounts and allow the entire Section 80-IA deduction of ₹32,19,52,570. The assessee’s appeal was allowed.
Key takeaway: A commercially useful and measurable by-product cannot be assigned nil cost merely because no additional expenditure is incurred after the point of its extraction. For Section 80-IA(8), the Revenue must examine its market value; it cannot ignore the output altogether while charging the entire common cost against the other output.
Cases Discussed
- Principal Commissioner of Income-tax v. Jay Chemical Industries Ltd., [2020] 120 com 315 (Gujarat)
- DCIT v. DCM Shriram Ltd., [2025] 176 com 51 (Delhi Tribunal)
- DCIT v. Vishal Fabrics Ltd., 120221 139 com 30 (Ahmedabad Tribunal)
- ACIT v. Nandan Denim Ltd., 120231 156 taxmann.com 287 (Ahmedabad Tribunal)
- Tata Chemicals Ltd. v. DCIT, ITA No.3093/Mum/2023
- KR Pulp & Papers Ltd., ITA No.755/Del/2022
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order dated 01.09.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [“CIT(A)”], under section 250 of the Income-tax Act, 1961 [“the Act”], for the assessment year 2018-19. The impugned appellate order arises from the assessment order dated 22.04.2021 passed by the National e-Assessment Centre [“the Assessing Officer”] under section 143(3) read with section 144B of the Act.
2. The assessee has raised the following grounds of appeal:
1. In law and in the facts and circumstances of the Appellant’s case, the Ld. CIT(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 assessee is a company engaged in the business of manufacturing finished paper products by recycling waste paper and marketing such products in the domestic and international markets. It filed its return of income for the assessment year 2018-19 on 08.10.2018, declaring total income of Rs.5,31,39,200/- after claiming deduction of Rs.32,19,52,570/-under Chapter VI-A of the Act. The return was processed under section 143(1) of the Act on 02.02.2020.The case was selected for complete scrutiny under CASS in the E-assessment Scheme, 2019, inter alia, for verification of the deduction claimed in respect of an industrial undertaking under section 80-IA of the Act. Notice under section 143(2) was served upon the assessee on 22.09.2019. Notices under section 142(1) were thereafter issued on 18.12.2020, 09.03.2021 and 12.03.2021. In response thereto, the assessee furnished the details, explanations and supporting documents called for during the assessment proceedings.
4.2. The assessee had claimed deduction under section 80-IA(4) in respect of Unit V, being a 15 MW captive cogeneration power plant situated at Sarigram, Kale Road, Village Angam and Sarigram, Taluka Umbergaon, District Valsad. The profit and loss account of the eligible unit furnished during the assessment proceedings reflected revenue from electricity generation of Rs.69,41,23,907/-. The total cost of the unit was shown at Rs.71,90,11,024/-, comprising the following:
| 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/- |
4.3. From the aforesaid total cost, the assessee reduced Rs.37,97,84,115/- as the cost attributable to low-pressure steam transferred to and used by its paper-manufacturing division. Consequently, the cost attributable to electricity generation was computed at Rs.33,92,26,909/- and the book profit of the eligible unit was worked out at Rs.35,48,96,998/-. After adding back depreciation of Rs.1,53,51,814/- charged under the Companies Act and reducing depreciation of Rs.4,82,96,242/- 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 |
|---|---|
| Revenue from electricity generation | Rs.69,41,23,907/- |
| Total operating cost | Rs.71,90,11,024/- |
| Less: Cost attributable to low-pressure steam | Rs.37,97,84,115/- |
| Cost attributable to electricity generation | Rs.33,92,26,909/- |
| Profit as per books | Rs.35,48,96,998/- |
| Add: Depreciation under the Companies Act | Rs.1,53,51,814/- |
| Less: Depreciation under the Income-tax Act | Rs.4,82,96,242/- |
| Profit eligible for deduction under section 80-IA | Rs.32,19,52,570/- |
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 captive cogeneration power plant equipped with a 15 MW extraction-condensing turbine. According to the assessee, the plant had been installed to fulfil two requirements of the paper-manufacturing business, namely, generation of electricity and supply of steam for drying paper. It was stated that coal was burnt in the boiler furnace to heat water and generate high-pressure steam. The high-pressure steam was sent to the turbine, where the heat energy of the steam was converted into mechanical energy and thereafter into electrical energy through the generator connected to the turbine shaft. During this process, a part of the steam lost pressure and emerged as low-pressure steam, which was supplied to the paper division for drying paper. The remaining steam was used for heating the feed water in the boiler. The assessee submitted that the total operating cost of the cogeneration plant related to both electricity generation and the production or availability of low-pressure steam used by the paper division. Therefore, the entire cost could not be charged only against the revenue from electricity generation. Since the low-pressure steam was transferred to the paper division at cost and without any mark-up, the proportionate cost attributable to such steam was reduced from the total operating cost of the eligible unit.
4.6. The assessee further explained that the allocation was made on the basis of the quantity of steam generated and used. The total quantity of steam generated during the year was stated to be 5,69,735 metric tonnes. The total operating cost of Rs.71,90,11,024/- was divided by the total quantity of steam, giving a cost of approximately Rs.1,262/- per metric tonne. Out of the total steam generated, 3,00,936 metric tonnes represented low-pressure steam used by the paper division, whereas the balance quantity of 2,68,799 metric tonnes represented high-pressure steam attributable to electricity generation. On this basis, the cost was allocated as follows:
| Particulars | Quantity/amount |
|---|---|
| Total operating cost of Unit V | Rs.71,90,11,024/- |
| Total quantity of steam generated | 5,69,735 MT |
| Cost per metric tonne of steam | Rs.1,262/- |
| Low-pressure steam supplied to the paper division | 3,00,936 MT |
| Cost allocated to low-pressure steam | Rs.37,97,84,115/- |
| High-pressure steam attributable to electricity generation | 2,68,799 MT |
| Cost 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.1 OCCB 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 further observed that no separate profit and loss account in respect of low-pressure steam had been furnished and that the assessee had failed to establish that the residual low-pressure steam, after generation of electricity, was used for drying paper in the non-eligible unit.
5. On the aforesaid basis, the AO held that the cost attributable to low-pressure steam could not be reduced from the total cost of power generation. Upon considering the entire cost of Rs.71,90,11,024/- against the electricity-generation revenue of Rs.69,41,23,907/-, the AO computed a loss of Rs.2,48,87,117/-in the eligible undertaking. He consequently disallowed the deduction of Rs.32,19,52,570/- claimed under section 80-IA(4) and added the same to the total income of the assessee.
6. Aggrieved by the assessment order, the assessee instituted an appeal before the CIT(A). Insofar as the deduction under section 80-IA was concerned, the assessee reiterated that Unit V was a 15 MW captive cogeneration power plant which simultaneously catered to the requirements of electricity and steam for the paper-manufacturing process. It was explained that paper manufacturing was a continuous process requiring uninterrupted electrical power as well as steam for drying paper. The cogeneration plant had, therefore, been installed to obtain both inputs simultaneously and to minimise production and transmission losses.
7. The assessee contended that the cogeneration plant generated high-pressure steam in the boiler. The high-pressure steam was used in the turbine for generation of electricity and, upon losing pressure, emerged as low-pressure steam, which was transferred to the paper division for drying paper. It was submitted that the total cost of the plant was required to be allocated between the electricity-generation activity and the low-pressure steam supplied to the paper division. Since the paper division was charged only the proportionate cost of the low-pressure steam without any mark-up, the assessee reduced such cost from the total expenditure of the eligible undertaking.
8. The assessee placed reliance upon the report in Form No. lOCCB and the working certified by the Chartered Accountant. It also referred to the meters installed in the plant, the physical logbook recording the quantity of total steam and low-pressure steam, details available on its website concerning the cogeneration 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 arose from the integrated operation of the same plant, no separate profit and loss account for low-pressure steam was required. The assessee maintained that the common cost had been allocated between the two outputs by a reasonable and consistently ascertainable method, supported by the quantity recorded in the meters and logbooks and certified in Form No. lOCCB.
11. The CIT(A) examined the process of generation and use of high-pressure and low-pressure steam. He noticed that, at one place, the assessee had stated that coal was burnt in the boiler to generate high-pressure steam, which was used in the turbine for generation of electricity and thereafter lost pressure and became low-pressure steam. At another place, the assessee had stated that the cogeneration plant generated two types of steam, namely, high-pressure steam and low-pressure steam. The CIT(A) considered these statements to be ambiguous regarding whether low-pressure steam was produced separately or represented high-pressure steam which had lost pressure after being used for generation of electricity.
12. The CIT(A) further observed that the assessee had not furnished the details of the manufacturer and the power-generation machinery used in the steam power-generation plant. He referred to information obtained from the website of Solar Turbines, described in the appellate order as a leading turbine manufacturer, concerning cogeneration solutions for the pulp-drying process. On the basis of that information, the CIT(A) recorded that high-pressure steam generated in the boiler was used for power generation; after such use, it lost pressure and the resulting low-pressure steam was sent to the paper plant through an exhaust pipe; and the low-pressure steam was ultimately condensed into water and reused in the boiler.
13. From the aforesaid process, the CIT(A) concluded that low-pressure steam was a by-product of the cogeneration power plant and was generated without any separate cost. According to him, it was not produced independently or exclusively for the paper division. He, therefore, rejected the assessee’s allocation of Rs.37,97,84,115/- out of the total operating cost to low-pressure steam and held that the scientific process of the cogeneration plant did not support the method adopted by the assessee.
14. The CIT(A) consequently affirmed the AO’s conclusion that, without reducing 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. 200708 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 plant was designed to produce both electricity and useful steam for the pulp and paper process. The AR further contended that the section 80-IA report certified by an independent Chartered Accountant is stated to contain month-wise details of:
- total cost of Rs.71,90,11,024/-;
- total steam of 5,69,735 MT;
- low-pressure steam of 3,00,936 MT;
- cost of Rs.1,262/- per MT; and
- cost of Rs.37,97,84,115/- attributed to low-pressure steam.
17. The AR also submitted that the computerised totaliser readings, physical shift logbooks and the certified section 80-IA report arereconciled with each other and for June 2017, the records reportedly show total steam of approximately 45,201 MT and low-pressure steam of 22,607 MT.
18. The learned AR contended that reducing the cost attributable to low-pressure steam from the total cost and, alternatively, crediting the same amount as inter-unit revenue produce the identical profit of Rs.35,48,96,998/ -.It was submitted that a separate profit and loss account for low-pressure steam was neither required nor appropriate because Unit V, being the complete cogeneration plant, is the eligible undertaking and low-pressure steam is merely one of its integrated outputs.
19. The learned AR further assailed the finding of the CIT(A) that low-pressure steam was generated without any cost. It was submitted that the CIT(A) had conflated the absence of additional fuel consumption after the turbine stage with the absence of an attributable share in the common cost already incurred. According to the learned AR, the low-pressure steam carried a proportionate part of the expenditure incurred on fuel, boiler operations, water treatment, labour, repairs, depreciation, auxiliary consumption and other operating inputs of the integrated cogeneration process. Merely because no further fuel was consumed after extraction of the steam from the turbine, the cost embedded in such steam could not be treated as nil.
20. The learned AR submitted that low-pressure steam was a measurable and commercially useful output which was transferred to the paper division and consumed for drying paper. If such steam were not available, the paper division would have been required to generate or procure equivalent thermal energy separately. Its description as a by-product, therefore, could not 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. (20201 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.
22. The learned AR further submitted that the alleged loss of Rs.2,48,87,117/- arose only because the Revenue recognised the revenue from electricity alone while debiting the entire common cost incurred for generating both electricity and useful steam. Once the second output was appropriately recognised, either by reducing the cost attributable to low-pressure steam from the common cost or by crediting its inter-unit transfer value as revenue, the profit under both presentations worked out to Rs.35,48,96,998/-. Thus, according to the learned AR, the assessee had not converted a loss into profit by an accounting adjustment.
23. The reliance placed by the CIT(A) on material obtained from the website of Solar Turbines was also challenged. It was submitted that the cited material concerned a gas-turbine-based pulp-drying configuration involving exhaust gases, a heat-recovery steam generator and a Yankee hood or cylinder, whereas the assessee’s plant comprised its own boiler, steam turbine, extraction system, meters and logbooks. A general illustration concerning a different plant configuration could not displace the plant-specific records furnished by the assessee. It was further submitted that the third-party material had not been confronted to the assessee before being used adversely.
24. The learned AR explained that Unit V employed an extraction-condensing turbine. A part of the steam was extracted before completing its expansion because, at that stage, it retained sufficient thermal energy for use in the paper division, while the balance steam continued through the turbine and was ultimately condensed after further generation of electricity. Consequently, an extraction turbine necessarily generated less electricity than a purely condensing turbine handling the same quantity of steam. The comparatively lower electricity generation of Unit V was therefore stated to be the natural consequence of extracting useful steam for the paper division and not an anomaly in the accounts.
25. The learned AR contended that the adverse technical conclusion recorded by the CIT(A) was unsupported by any expert report, manufacturer’s specification, plant-inspection report, defect in the installed meters or alternative engineering computation. On the contrary, the process explanation, computerized totaliser readings, physical logbooks, monthly statements, separate 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 decisionsin DC/T DCM Shriram Ltd. (20251 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. 120221 139 taxmann.com 30 (Ahmedabad Tribunal) and ACIT v. Nandan Denim Ltd. 120231 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 carrying an ascertainable transfer value. According to the learned AR, the dispute could, at the highest, relate to the appropriate method or quantum of valuation, but the steam could not be treated as having no cost or value whatsoever.
27. The learned AR lastly reiterated that the identical exercise of reallocating the cost between high-pressure steam and low-pressure steam had already been rejected by the Co-ordinate Bench in the assessee’s own case for the earlier assessment years. It was accordingly prayed that the separately maintained and audited accounts of the eligible undertaking be accepted and the deduction of Rs.32,19,52,570/- claimed under section 80-IA of the Act be allowed.
28. The learned Departmental Representative relied upon the order of the CIT(A) and submitted that the assessee had not furnished details regarding the manufacturer or the machinery installed in the cogeneration power plant. He submitted that the material furnished by the assessee did not clearly establish whether low-pressure steam was generated separately or whether the high-pressure steam, after being utilised for generation of electricity, lost pressure and was thereafter transferred to the paper division for drying paper. Thus, according to the learned DR, the explanation furnished by the assessee regarding the process of generation and utilisation of steam was ambiguous.
29. The learned DR further referred to the information obtained by the CIT(A) from the website of Solar Turbines, a Caterpillar company, relating to cogeneration solutions for the pulp-drying process. On the basis of the process described therein, he submitted that high-pressure steam generated in the boiler was first utilised for generation of electricity and, after losing pressure, the resulting low-pressure steam was supplied to the paper division and ultimately condensed into water for reuse in the boiler. He accordingly contended that low-pressure steam was merely a by-product of the cogeneration process and did not involve any separate cost of production. The assessee was, therefore, not justified in reducing the amount attributed to low-pressure steam from the total expenditure of the power-generation undertaking. Such reduction had converted the loss of Rs.2,48,87,117/- into a profit and resulted in the claim of deduction of Rs.32,19,52,570/- under section 80-IA(4) of the Act. The learned 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. Thirdly, the correctness of the computation made by the AO has to be tested in the light of section 80-IA(8). Lastly, it has to be determined whether the issue is governed by the decision of the coordinate bench in the assessee’s own case.
32. Unit V is a 15 MW cogeneration power plant. Coal is burnt in the boiler to convert water into high-pressure steam. The high-pressure steam is supplied to an extraction-condensing turbine. While passing through the turbine, a part of its pressure and thermal energy is converted into mechanical energy and thereafter into electrical energy. A part of the steam is extracted at the required lower pressure and transferred to the paper division, where its residual thermal energy is used for drying paper. The remaining steam continues through the turbine and is ultimately condensed.
33. Thus, high-pressure steam and low-pressure steam are not generated by two separate manufacturing facilities. They represent the same steam at different pressure and energy stages of one continuous process. At the boiler stage, the steam possesses high pressure and higher thermal energy. After performing part of its work in the turbine, the steam extracted for use in the paper division possesses lower pressure but continues to contain commercially useful thermal energy.
34. The expressions “only one steam is generated” and “the cogeneration plant produces electricity and low-pressure steam” are, therefore, not contradictory. The former describes the physical continuity of the steam, whereas the latter identifies the two commercially useful outputs of the integrated cogeneration process.
35. The learned AR has explained that Unit V employs an extraction-condensing turbine. In such a turbine, a part of the steam is withdrawn before completing its full expansion because it retains the pressure and thermal energy required by the paper division. The balance steam is permitted to expand further and is thereafter condensed. If the extracted steam had been permitted to continue its complete expansion through the turbine, it could have generated additional electricity. Its extraction for the paper division necessarily reduces the electricity capable of being generated from the same quantity of high-pressure steam. Therefore, the useful low-pressure steam supplied to the paper division is not merely an accidental residue after electricity generation. 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 as well as useful process steam. The absence of fresh fuel consumption after extraction does not extinguish the common cost already incurred and embedded in the extracted steam.
38. This distinction may be stated in the following terms:
| Relevant concept | Effect in the present case |
|---|---|
| Incremental cost after extraction | There may be no further fuel cost after the steam is extracted |
| Common cost incurred up to extraction | Fuel, boiler, water-treatment and other generation costs have already been incurred |
| Residual utility | Extracted steam retains thermal energy and is used for drying paper |
| Cost consequence | Absence of further fuel consumption does not result in nil embedded cost |
39. The description of low-pressure steam as a by-product does not determine its cost or value. A by-product may have a lower value than the principal product, but it does not follow that every by-product must necessarily be valued at nil. The decisive considerations are whether the output is identifiable, measurable, commercially useful and capable of being transferred or consumed. In the present case, the low-pressure steam satisfies all these characteristics.
40. The low-pressure steam is separately measured, transferred to the paper division and consumed for drying paper. If it were not available from Unit V, the paper division would have to obtain equivalent thermal energy from another source. A useful energy output which avoids the cost of procuring or separately generating thermal energy cannot be treated as having nil economic value merely because it arises during a cogeneration process.
41. The assessee furnished a certified working containing month-wise particulars of total steam, low-pressure steam, cost per metric tonne and the amount attributable to low-pressure steam transferred to the paper division. According to the said working, the total cost of Unit V was Rs.71,90,11,024/-, the total steam generated was 5,69,735 MT, the low-pressure steam transferred was 3,00,936 MT, the adopted rate was Rs.1,262/- per MT and the cost attributed to low-pressure steam was Rs.37,97,84,115/-.
42. The assessee also relied upon the readings of the installed monitoring and totaliser system, the physical shift logbooks and the reconciliation of these records with the monthly figures reported for the purposes of section 80-IA. The assessee demonstrated, by 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.
42. The electricity revenue of Unit V amounted to Rs.69,41,23,907/- and its total cost amounted to Rs.71,90,11,024/-. The assessee attributed Rs.37,97,84,115/- to the low-pressure steam supplied to the paper division. Consequently, the net cost attributable to electricity was computed at Rs.33,92,26,909/- and the profit was determined at Rs.35,48,96,998/-. After making the relevant adjustments, the assessee claimed deduction of Rs.32,19,52,570/- under section 80-IA.
43. The transfer of low-pressure steam may be represented in the accounts either by reducing the cost attributable to such steam from the total cost or by retaining the entire cost in Unit V and crediting the value of the steam as inter-unit revenue. The effect of the two methods is as under:
| Particulars | Cost-reduction method | Revenue-recognition method |
|---|---|---|
| Electricity revenue | Rs.69,41,23,907/- | Rs.69,41,23,907/- |
| Value of low-pressure steam | Nil | Rs.37,97,84,115/- |
| Total revenue | Rs.69,41,23,907/- | Rs.1,07,39,08,022/- |
| Total cost | Rs.71,90,11,024/- | Rs.71,90,11,024/- |
| Less: Cost attributable to low-pressure steam | Rs.37,97,84,115/- | Nil |
| Net cost considered | Rs.33,92,26,909/- | Rs.71,90,11,024/- |
| Profit | Rs.35,48,96,998/- | Rs.35,48,96,998/- |
47. Therefore, the profit does not arise merely because the assessee has adopted the cost-reduction method. The same profit results if the value of low-pressure steam is credited as inter-unit revenue while the entire common cost is retained in Unit V.
48. The loss of Rs.2,48,87,117/- determined by the AO results from an incomplete matching exercise. The AO recognised only electricity revenue of Rs.69,41,23,907/- but charged against it the entire common cost of Rs.71,90,11,024/- incurred in producing electricity as well as useful steam. The value of the second output was simultaneously ignored. The alleged conversion of a loss into profit is, therefore, a consequence of the AO’s premise that the useful steam has nil cost and nil value. Once that premise is found to be untenable, the resulting loss also cannot be sustained.
49. Section 80-IA(8) applies where goods or services held for the purposes of an eligible business are transferred to any other business carried on by the assessee. The profits of the eligible business are required to be computed as if the transfer had been made at the market 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 undertaking’s accounts merely by describing the steam as a byproduct.
53. The controversy is substantially covered by 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. In paragraph 62, the coordinate bench recorded the following finding:
“We find that whole basis of additions made by the revenue is that Assessee is producing 2 kinds of steam namely high pressure steam (HP) and low pressure steam (LP) and separate cost of each kind of steam is required to be found out is fundamentally erroneous. After considering the factual matrix of the case and the diagram shown to us, we are in agreement with the learned senior counsel for the assessee that the assessee is not producing 2 different kinds of steam. It is fact that from the boiler steam is generated, it is of high pressure which is used to rotate the turbine, further once the turbine is rotated the steam released becomes low pressure. Therefore, there is only one steam; before it is put into turbine it is having high pressure and post the turbine stage it is low pressure.”
54. The coordinate bench further held:
“Accordingly, the whole attempt to allocate costs to these 2 kinds of steam is fundamentally not correct. We are also convinced with the submissions that once, the assessee has claimed relevant cost of power plant and recognized revenue for generation of power and steam at specific value and AO has not brought any evidences that steam value charged from other unit is not at market value, the AO is not empowered to re-compute profit and loss account of eligible unit.”
55. The operative conclusion of the coordinate bench reads as under:
“Therefore, considering these facts, there is no need to prepare re-casted Profit & loss account or compute excess LP cost recovered from Paper units as made by AO as well as by Ld. CIT(A). Accordingly we set aside the method of cost re-allocation for HP steam and LP steam initially worked out by AO and further method of allocation of cost made by ld. C17(A).”
56. The earlier decision concerned Unit I, which was stated to be a 5 MW extraction-condensing turbine, whereas the present appeal concerns Unit V, a 15 MW cogeneration plant. However, the difference in generating capacity does not distinguish the principle decided. The material process remains the 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 cannot be sustained.
59. Judicial discipline requires that the decision of a coordinate bench in the assessee’s own case on the same issue and materially similar facts be followed unless there is a material change in facts, an amendment in the governing provision or a contrary decision of a higher judicial forum. No such distinguishing circumstance has been brought to our notice. We, therefore, respectfully follow the aforesaid decision.
60. In Principal Commissioner of Income-tax v. Jay Chemical Industries Ltd., reported in [2020] 120 com 315 (Gujarat), the Hon’ble Gujarat High Court held:
“22. The word ‘Power’ should be understood in common parlance as `Energy’. ‘Energy’ can be in any form being mechanical, electricity, wind or thermal. In such circumstances, the ‘steam’ produced by the assessee can be termed as power and would qualify for the benefits available under section 80IA(4) of the Act.”
61. The aforesaid decision establishes that steam, being thermal energy, constitutes “power” for the purposes of section 80-IA(4). It does not prescribe a universal method of cost allocation, but it does negate the premise that useful steam is an irrelevant output lying outside the eligible activity.
62. In DCIT v. DCM Shriram Ltd., [2025] 176 com 51 (Delhi Tribunal), the Co-ordinate Bench examined the contention that steam was a by-product whose cost had already been absorbed in the manufacturing activity. After considering the applicable cost-accounting standards and certified cost statements, the Co-ordinate Bench held:
“40. Therefore, from the above analysis it is apparent that the learned revenue authorities have incorrectly held that there is no cost of production of steam.”
It further observed:
“41. Even otherwise steam is a commercially viable product and it is a form of power and therefore it cannot be said to be produced at nil cost. The assessee has submitted a detailed cost sheet duly certified by the cost accountant following the standards issued by the Institute of cost and works accountant for determining the exact cost of steam, it has also been certified by the chartered accountant and further a chartered engineer certificates is also provided. All these cost statement duly certified by the professionals were rejected by the learned revenue authorities without any basis.”
63. The aforesaid 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., 120221 139 com 30 (Ahmedabad Tribunal); and ACIT v. Nandan Denim Ltd., 120231 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 and manner of transfer may differ from one plant to another. We, therefore, rely upon these decisions only for the governing principles and not for importing any numerical valuation from those cases.
66. The decision in Tata Chemicals Ltd. v. DCIT, ITA No.3093/Mum/2023, stands on a different factual footing. In that case, the assessee sought, through an additional ground, to value the transfer of steam at market value instead of cost. The Tribunal admitted the additional claim and restored the question for examination. The said decision does not determine the precise cost or market value of the steam involved in the present appeal and is, therefore, not decisive of the present quantification.
67. The learned CIT(A) relied upon general information obtained from the website of Solar Turbines concerning a gas-turbine based pulp-drying arrangement involving turbine exhaust gases, a heat-recovery steam generator and a Yankee hood or cylinder. Such general information cannot prevail over the plant-specific material produced by the assessee unless it is first demonstrated that the configuration and operating process described on that website are materially identical to Unit V. The assessee’s case is supported by its boiler and extraction-condensing turbine process, installed meters, physical logbooks, audited accounts and certified quantitative records. The authorities below have neither obtained a technical report concerning Unit V nor shown that the records maintained by the assessee are unreliable. Even the website material relied upon by the learned CIT(A) states that the cogeneration system supplies electricity as well as steam or hot air for the pulp-drying process. It supports the existence of useful heat as an output of cogeneration. It does not state that such useful thermal output has nil embedded cost. It was also contended that the third-party material was not confronted to the assessee before being used adversely. In view of our conclusion on the merits and our decision to follow the coordinate bench order in the assessee’s own case, it is not necessary to rest our decision solely on this procedural objection. Nevertheless, third-party technical material should ordinarily be confronted to the affected party before an adverse inference is drawn therefrom.
68. On an overall consideration of the facts, we find that:
i. high-pressure steam and 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 the assessee by the decision of the coordinate bench in its own case.
69. We clarify that our conclusion does not lay down that the rate of Rs.1,262/- per MT adopted by the assessee is the only scientifically permissible method of valuing low-pressure steam in every cogeneration plant. Our decision is confined to the facts and evidence of the present case. The authorities below have not identified any defect in the assessee’s computation, established an alternative market value or otherwise furnished a reasonable basis for rejecting the recorded value and substituting it with nil.
70. In view of the foregoing discussion and respectfully following the order dated 05.07.2021 passed by the coordinate bench in the assessee’s own case, we hold that the AO and the learned CIT(A) were not justified in assigning nil cost to the low-pressure steam and charging the entire common cost of the cogeneration plant exclusively against electricity revenue. The consequent computation of loss of Rs.2,48,87,117/- and disallowance of the deduction claimed under section 80-IA cannot be sustained.
71. We, accordingly, set aside the impugned finding of the learned CIT(A) and direct the AO to accept the profit of the eligible undertaking as disclosed in its separately maintained and audited accounts and allow the deduction of Rs.32,19,52,570/-claimed by the assessee under section 80-IA. Ground Nos.1 and 2 are allowed.
72. Ground No.3 is general in nature and does not require separate adjudication.
73. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 14.08.2026.
