Additional depreciation on Plants & machinery installed in Captive Power Plant

PCIT Vs Kadodara Power Pvt Ltd (Gujarat High Court)

It is now a settled position as held by the Hon’ble Supreme Court and the various Co­ordinate Benches of the Tribunal that the process of generation of electricity is akin to manufacture of an article or thing, the assessee in the instant case satisfy the requirement that it is engaged in the business of manufacture or production of an article or thing. Now coming to the amendment which has been brought­in by the Finance Act 2012 w.e.f. A.Y. 2013-­14 whereby the assessee engaged in the business of generation or generation & distribution of power have specifically been included and held eligible for claim of additional depreciation. In our view, the said amendment cannot be held to disentitle the assessee to claim of the additional depreciation. Various Coordinate Benches have held that even prior to the amendment brought in by the Finance Act, 2012, the assessees enegaged in generation or generation and distribution of electricity were held eligible for additional depreciation. In this regard, reference can be drawn to the decision of NTPC Ltd. (supra). No contrary authority has been brought to our notice. In our view, the said amendment cannot be read to negate the settled legal position that generation of electricity is akin to manufacture or production of an article or thing. The said amendment by the Finance Act 2912 gives an impetus to the view that generation of electricity is a manufacturing process. In light of above, the assessee is held entitled to the additional claim of depreciation on plants and machinery installed in the Captive Power Plant.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

1. This tax appeal under Section 260A of the Income Tax Act, 1961 [for   short  ‘the   Act,   1961’]   is   at   the   instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Surat Bench, Surat in the ITA No.143/AHD/2016, dated 06/09/2018 for the A.Y 2006-­07.

2. The Revenue has proposed the following substantial question of law for the consideration of this Court:­

(i) Whether on the facts and in circumstances of the case and in law, the Income Tax Appellate Tribunal is   right in deleting the disallowance of additional depreciation claimed by the assessee  u/s.32(1)(ii)?

3. It is not in dispute that the assessee is in the business of generation of power. The assessee claimed the additional depreciation of Rs.1,11,25,307/­ on the power plant and electric installations. The Assessing Officer declined to grant such additional depreciation taking the view that plants and machinery are covered under section 32(1)(i) of the Act, on which, normal depreciation is allowable. The Assessing Officer took the view that the additional depreciation at 20% would be allowable under section 32(1)(ii) in respect of the plants and machinery acquired and installed after 31^st March 2005 and used in the manufacturing or production of articles or things. In short, the view was taken that the assessee company could not be said to be producing any articles or things it being a power generating company.

4. The assessee being dissatisfied with the disallowance at the end of the Assessing Officer preferred an appeal before the CIT(A). The CIT(A) concurred with the findings recorded by the Assessing Officer and ultimately, dismissed the appeal.

5. The assessee preferred an appeal before the ITAT, Surat Bench at Surat. The ITAT allowed the appeal preferred by the assessee and granted the additional depreciation on the plants and machinery installed in the Captive Power Plant.

6. Being dissatisfied with the order passed by the ITAT, the Revenue is here before this Court with the present appeal proposing substantial question of law as referred to above.

7. We take notice of the fact that the ITAT while allowing the appeal of the assessee observed in Paragraphs­11 and 12 of its impugned order are as under:­

11. We may note that the expression ‘article or thing’ used in section 32(1)(iia) is not defined in the IT Act, 1961. The Supreme Court in case of State of Andhra Pradesh Vs. NTPC Ltd. 5 SSC 203 held that electricity is ‘goods’ and therefore production/generation of electricity is production of article or thing. Further, Delhi Tribunal in case of NTPC Ltd. Vs.DCIT (2012) 54 SOT 177 wherein assessee’s claim of additional depreciation was disallowed on the ground that power/ electricity generated by assessee could not be equated with an article or thing which was being manufacturing in an industrial undertaking, held that if there can be sale and purchase of electric energy like any movable object, then electric energy is covered by the definition of goods and thus admissibility of additional depreciation could not be denied to assessee merely on the ground that electricity is not an article and thing. In view of the said decisions, P&M acquired and installed by assessee for generation of electricity is akin to manufacture or production of an article or thing and consequently assessee is entitled for additional depreciation u/s.32(1)(ia) on same.

12. It is now a settled position as held by the Hon’ble Supreme Court and the various Co­ordinate Benches of the Tribunal that the process of generation of electricity is akin to manufacture of an article or thing, the assessee in the instant case satisfy the requirement that it is engaged in the business of manufacture or production of an article or thing. Now coming to the amendment which has been brought­in by the Finance Act 2012 w.e.f. A.Y. 2013­14 whereby the assessee engaged in the business of generation or generation & distribution of power have specifically been included and held eligible for claim of additional depreciation. In our view, the said amendment cannot be held to disentitle the assessee to claim of the additional depreciation. Various Coordinate Benches have held that even prior to the amendment brought in by the Finance Act, 2012, the assessees enegaged in generation or generation and distribution of electricity were held eligible for additional depreciation. In this regard, reference can be drawn to the decision of NTPC Ltd. (supra). No contrary authority has been brought to our notice. In our view, the said amendment cannot be read to negate the settled legal position that generation of electricity is akin to manufacture or production of an article or thing. The said amendment by the Finance Act 2912 gives an impetus to the view that generation of electricity is a manufacturing process. In light of above, the assessee is held entitled to the additional claim of depreciation on plants and machinery installed in the Captive Power Plant. Hence, the Ground No.2 of appeal of the assessee is allowed.

8. The issue raised by the Revenue is no longer res­integra in view of a decision of the Delhi High Court in the case of Principal Commissioner of Income­tax, New Delhi Vs. NTPC Sail Power Co. (P.) Ltd. reported in [2019] 103 taxmann.com 398 (Delhi).

9. The Delhi High Court in NTPC Sail Power Co. (p.) Ltd (supra) relied upon the decision of the Supreme Court in the case of State of Andhra Pradesh Vs. NTPC Ltd. reported in AIR 2002 SC 1895. The Delhi High Court also took note of the fact that with effect from 01.04.2013, the provision i.e. Section 32 of the Act has been amended by the Finance Act, 2012 and the assessee engaged in the generation of power has expressly been included in the ambit thereof. The Delhi High Court by placing reliance on Supreme Court decision referred to above ultimately took the view that the electricity has all the necessary trappings of “articles” or “things” and the benefit of additional depreciation cannot be denied. We quote the relevant observations as under:­

6. Section 32(1)(iia) of the Act as it stood at the relevant time, read as follows:

“32. Depreciation: (1) In respect of depreciation of ­….(iia) In the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the taxguru.in business of manufacture or production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).”

7. Learned counsel for the assessee has drawn our attention to the judgment of the Karnataka High Court dated 16.09.2014 in ITA No.08/2014 [Commissioner of Income Tax vs. The Hutti Gold Mines Co. Ltd.] wherein the question of additional depreciation was considered and it was held as follows:

“3. The material on record shows that the assessee is generating electricity through windmill as a second line of business. It is a product of the assessee company. It is covered under the words “article” or “thing”, which is tradable / identifiable. In other words, the electricity falls within the definition of Sale of Goods Act, 1930, and process of generation of electricity is akin to manufacture or production of an “article” or “thing”. The power generated need not necessarily be used in the production of assessee’s own products namely mining and extraction of gold. The use of electricity in the manufacturing activity of the core business of the assessee is not a precondition for the grant of additional depreciation under the statute. Therefore, we do not see any merit in this appeal. Accordingly, this appeal is rejected.

4. However, we have not gone into the question of applicability of Section 32(1)(iia) of the Income Tax Act, 1961, and the question as to whether clarificatory or not is kept open to be decided at proper time.”

Although the Karnataka High Court held that it was not going into the question of Section 32(1)(iia) and the question of whether the subsequent amendment was clarificatory, the analysis of the Court is in our view also applicable to the interpretation of the said provision for the purposes of the present dispute.

8. Similarly, it is clear that electricity has been held to be “goods” for the purposes of sales tax in the Constitution Bench judgment of the Supreme Court in State of Andhra Pradesh vs. NTPC Ltd. AIR 2002 SC 1895. The Supreme Court, in that judgment held as follows:

“20. Before we deal with the constitutional aspects let us first state what electricity is, as understood in law, and what are its relevant characteristics. It is settled with the pronouncement of this Court in Commissioner of Sales Tax, Madhya Pradesh, Indore v. Madhya Pradesh Electricity Board, Jabalpur – 1969(2) SCR 939 that electricity is goods. The definition of goods as given in Article 366 (12) of the Constitution was considered by this Court and it was held that the definition in terms is very wide according to which “goods” means all kinds of moveable property. The term “moveable property” when considered with reference to “goods” as defined for the purpose of sales­tax cannot be taken in a narrow sense and merely because electrical energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be moveable property when it has all the attributes of such property. It is capable of abstraction, consumption and use which if done dishonestly is punishable under Section 39 of the Indian Electricity Act, 1910. If there can be sale and purchase of electrical energy like any other moveable object, this Court held that there was no difficulty in holding that electric energy was intended to be covered by the definition of “goods”. However, A.N.Grover, J., speaking for three­Judge Bench of this Court went on to observe that electric energy “can be transmitted, transferred, delivered, stored, possessed etc. in the same way as any other moveable property”. In this observation we agree with Grover. J., on all other characteristics of electric energy except that it can be “stored‟ and to the extent that electric energy can be “stored‟, the observation must be held to be erroneous or by oversight. The science and technology till this day have not been able to evolve any methodology by which electric energy can be preserved or stored.”

9. The Tribunal’s judgment in NTPC vs. DCIT [relied upon in the orders of the CIT(A) as well as the Tribunal in the present case] followed this judgment of the Supreme Court to hold that electricity has all the necessary trappings of “articles” or “things” and the benefit of additional depreciation cannot be denied.

10. As held by the Constitution Bench, electricity is capable of abstraction, transmission, transfer, delivery, possession, consumption and use like any other movable property. Following the same logic, to deny the benefit of additional depreciation to a generating entity on the basis that electricity is not an “article” or “thing” is in our view an artificially restrictive meaning of the provision. taxguru.in The benefit of additional depreciation under Section 32(1)(iia) has, therefore, been rightly granted to the assessee by the concurrent judgments of the CIT(A) and the Tribunal.

11. We also note that, w.e.f. from 01.04.2013, the provision has been amended by the Finance Act, 2012 and assessees engaged in the generation of power have expressly been included in the ambit thereof.

10. This Court in the case of Commissioner of Income­tax­1 Vs. Diamines & Chemicals Ltd. reported in [2014] 42 taxmann.com 193 observed in Para­3 as under:­

3. Heard Shri K.M. Parikh, learned Counsel appearing on behalf of the revenue and perused the impugned judgement and order passed by the ITAT. At the outset, it is required to be noted that the assessee claimed the deduction under Section 32(1)(iia) of the Income Tax Act with respect to the cost incurred by it for installation of the Wind Electric Generator. The Assessing Officer disallowed the same and made the addition of Rs.1,17,98,030/­ by observing that as the assessee is not in the business of generation and distribution of power, the assessee shall not be entitled to deduction under Section 32(1)(iia) of the Income Tax Act of Rs.1,17,98,030/­. The said addition has been deleted by the CIT(A) relying upon the decisions of the Madras High Court in the case of VTM Ltd (Supra) and in the case of Hi Tech Arai Ltd. (Supra). In both the aforesaid decisions, the Madras High Court had an occasion to consider the similar issue and it is held that while claiming the deduction under Section 32(1)(iia) of the Income Tax Act setting up will mill has nothing to do with the power industry and what is required to be satisfied in order to claim additional depreciation is that the setting up of new machinery or plant should have been acquired and installed by an assessee, who was already engaged in the business of manufacture or production of any article or thing. Considering the aforesaid facts and circumstances and considering the relevant provisions of Section 32(1)(iia) of the Income Tax Act, which was prevailing at the relevant time, i.e. during the year under consideration, it cannot be said that the ITAT by applying the ratio of decision of the Madras High Court in the case of VTM Ltd (Supra) and in the case of Hi Tech Arai Ltd. (Supra) has committed any error in deleting the addition of Rs.1,17,98,030/­ on account of disallowance of additional depreciation of Wind Electric Generator.

11. In view of the aforesaid, no error not to speak of any error of law could be said to have been committed by the appellate tribunal in passing the impugned order.

12. In the result, this appeal fails and is hereby dismissed.