Delhi Tribunal grants additional depreciation on assets purchased for power generation

[CS Swati Dodhi]

FB 2012 - Delhi Tribunal grants additional depreciation on assets purchased for power generation

Recent ruling of the Delhi Income Tax Appellate Tribunal in the case of N.T.P.C Ltd. v. DCIT (2012 -TMI - 213142 - ITAT DELHI). The issue before the Tribunal was whether additional depreciation on assets installed at power plants, used for generation of electricity, was allowable under specific provisions of the Indian Tax Laws (ITL) which grant additional depreciation to a taxpayer engaged in the business of manufacture or production of any ‘article’ or ‘thing’. The Tribunal ruled that additional depreciation is allowable as electricity has all furnishing of article/goods and the process of its generation is related to manufacture or production of an article or thing.

Under specific provisions of the ITL (Section), in addition to regular depreciation, a taxpayer engaged in manufacture or production of an ‘article’ or ‘thing’ is entitled to claim additional depreciation of 20% on cost of new machinery or plant which are acquired and installed by the taxpayer after 31 March 2005.

The Taxpayer is engaged in the activity of coal-based thermal power generation. It distributed power to State Electricity Boards

For tax year 2004-05, the Taxpayer claimed additional depreciation on assets installed at two of its power plants. The claim was initially accepted by lower Tax Authority. However, the Commissioner of Income Tax (higher Tax Authority), exercising its  power under the ITL, held that the original assessment in which claim for additional depreciation was granted by lower Tax Authority was erroneous and prejudicial to the interests of the Revenue, inter alia, for the reason that the Taxpayer was not entitled to additional depreciation. CIT was of the view that activity of power generation is not part of activity of manufacture or production of any article or thing and, hence, directed lower Tax Authority to revise the assessement.

Taxpayer’s contentions:

The main object for claim of additional depreciation under the ITL, as is evident from budget speech of Finance Minister while introducing the Section, is to encourage investment in core sectors.

Tax Authority’s contentions:

Generation of power which produces electrical energy as output cannot be mentioned as manufacture or production of an ‘article’ or ‘thing’. An ‘article’ or ‘thing’ as known in common parlance is something tangible, movable etc. and having features such as weight, body and volume and Electricity does not have any of these features.

Many provisions of the ITL were defined in support that power sector is to treated for grant of deductions/exemptions as distinguished from other activities including manufacture or production of article or thing.

Tribunal’s ruling:

The Tribunal ruled in favour of the Taxpayer and held as follows:

The SC ruling relied on taxpayer suport that broadly manufacture is trasformation of an article which is comercially different fron the one which is converted.It brings into existence a product which is was intially existed and new product is different commodity .

Since electricity energy has all contrivance of an article of goods the process of generationj of electricity can be regarded as manufacture of 'article' or ' Thing'

Merely because electric energy is not tangible or cannot be moved or touched, it does not cease to be ‘goods’. It can be transmited, consumed, delivered and used as 'goods'

Coments:

It is pertinent to mention here that the Finance Bill 2012 prposes to expand the scope of Section with effect from to grant Additional Depriciation on assets installed at power plants, used for generation of electricity or prower on actual cost of new machiner acquired on or after 31.03.2012.

This ruling will help the tax payers to suport their claims in earlier years .The controversy dealt in this ruling may, therefore, not arise from tax year 2012-13 onwards.