Electricity is an item produced as an article , thing or goods and process of generation of electricity is akin to manufacture - initial depreciation allowed to NTPC.

[C.A. DEV KUMAR KOTHARI]

Initial deprecation under section 32(1) (iia):

Important links and references for provisions and case laws:

Section 32(1)(iia) of the Income-tax Act, 1961  - Initial Depreciation

Section 263 of the Income-tax Act, 1961 on revision of orders by CIT

Article 366(12) of the Constitution of India - the definition of goods.

 Meanings and definitions of  ‘article’ , ‘thing’ , ‘goods’  ‘electricity’  ‘production’ ,’ process’, ‘manufacture’,  ‘generation’  etc.

N.T.P.C. Ltd. v. Deputy Commissioner of Income-tax, Circle 13(1), New Delhi*

CST v. Madhya Pradesh Electricity Board [1968 (11) TMI 85 - SUPREME COURT OF INDIA]

 State of AP v. National Thermal Power Corpn. Ltd. [2002 (4) TMI 694 - SUPREME COURT OF INDIA]

India Cine Agencies v. CIT [2008 (11) TMI 15 – (SUPREME COURT).

Indian Aluminium Co. etc. etc. v. State of Kerala & Ors [1995 (4) TMI 62 - SUPREME COURT OF INDIA]

Spensley v. Lancashire Ins. Co., 54 Wis. 433, 442, 11 NW 894,

 Country of Durham Electricial, etc., Co. v. Inland Revenue (1)-  Banjamin on Sale, 8th Edn., page 171

Empire Industries Ltd. v. Union of India [1985] 3 SCC 314).

 Dy. CST (Law), Board of Revenue (Taxes) Coco Fibres [1992] Supp. 1 SCC 290).

CIT v. Hindustan Hosiery & Land Development Trust Ltd. [1986 (7) TMI 10 – (SUPREME COURT))

CIT v. N.C. Budharaja & Co. [1993 (9) TMI 6 – (SUPREME COURT)

Earlier articles by author about initial deprecation -

Initial deprecation:

An incentive popularly called as “initial deprecation” or “additional deprecation” is allowed in respect of cost of new eligible plant and machinery installed by assessee subject to compliance of conditions laid down in the provision. One of condition is that the assessee should be engaged in business of manufacture or production of an article or thing

Dispute:

In case of NTPC , by way of  revision proceedings under section 263 the revenue disputed that electricity cannot be considered  as an  article or thing manufactured or produced by assessee therefore assessee is not entitled to get initial depreciation on  cost of eligible  plant and machinery purchased / installed and put to use in business of generation of electricity. Initial deprecation was allowed by the AO. However the CIT passed an order u/s 263 holding that the assessment order was erroneous and prejudicial to the interest of revenue in as much as initial depreciation was wrongly allowed to the assessee because process of generation of electricity is not manufacturing, and electricity is not an article or thing manufactured by assessee. So he directed the AO to withdraw the initial deprecation allowed in assessment.  

  Decision of Tribunal:

The Tribunal found the following facts:

Assessee-company was engaged in the activity of generation of power.

The Commissioner  took view that  the Assessing Officer had allowed additional depreciation under section 32(1)(iia) which was not admissible to the assessee because additional depreciation is allowable to those undertakings which are engaged in the business of manufacture or production of any article or thing and generation of power could not be equated with the production of article or thing. Therefore, he directed the AO to withdraw the initial deprecation allowed to assessee. On appeal to the Tribunal, the Tribunal considered the following judgments:

CST v. Madhya Pradesh Electricity Board AIR 1970 SC 735

 State of AP v. National Thermal Power Corpn. Ltd. [2002] 127 STC 280W (SC),

India Cine Agencies v. CIT [2008 (11) TMI 15 – (SUPREME COURT).

and held that  the   process of generation of electricity is akin to manufacture or production of an article or thing and assessee engaged in activity of generation of electricity would be entitled to additional depreciation under section 32(1)(iia).

Analysis from judgments of the Supreme Court:

Electricity- Considered and  explained the meaning of electricity.

 Provisions of Sales Tax  Act- It also took into consideration the Sales-tax Act of the State of Andhra Pradesh as well as Madhya Pradesh and also considered the dictionary meaning.

Goods- The Court has considered the definition of goods as given in article 366(12) of the Constitution of India. Thereafter, the Court has observed that goods means, all kind of movable properties.

 Movable property – for the purpose of sales-tax, cannot be taken in a narrow sense and merely because electric 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 movable property when it has all the attributes of such properties. It is capable of abstraction, consumption and use of which, if done dishonestly, is punishable under section 39 of the Indian Electricity Act. If there can be sales and purchase of electric energy like any movable object, then there was no difficulty in holding that electric energy was intended to be covered by the definition of goods.

The expression 'article, thing or goods' are not defined in the Income-tax Act, 1961. The Commissioner, while treating the electricity as not an article or thing, has not made reference to any provisions of the Act. He simply construed the meaning of electricity as not article or thing on the basis of his own inference drawn from the nature of this item but if the conclusion drawn by the Commissioner is evaluated in the light of the decision of the Supreme Court given in the case of India Cine Agencies v. CIT [2008 (11) TMI 15 – (SUPREME COURT), Madhya Pradesh Electricity Board (supra) and NTPC (supra), then it would suggest that electric energy has all trapping of an article or goods. The process of its generation is also akin to manufacture or production of an article or thing.

Tribunal also held that the order of the AO taking a possible view on allowability of initial deprecation cannot be called an  order which is erroneous and prejudicial to interest of revenu.

Decision of Tribunal:

taking into consideration all above  aspects, admissibility of additional depreciation cannot be denied to the assessee merely on the ground that electricity is not an article or thing. The order of the Commissioner was reversed to this extent and the disallowance is deleted by the Tribunal.

Conclusion:

Electricity is an item of movable property which is an article or thing and generation of electricity is like manufacture or production of any other article or thing. Therefore, a producer of power like electricity is entitled to initial deprecation.

As per author, initial deprecation is an incentive, it should be liberally allowed as an incentive. It is unfortunate to note that though our legislators frame certain economic policies to provide for fiscal incentives  and describes the same in clear terms, still our revenue officers try to interpret provisions in such a manner so as to defeat the whole purpose of the incentive allowed. In this case by making investment for power generation, the assessee has made available more power (electricity) to industry and thus helped industry in production of other articles and things.

When an assessee engaged in production of any other article or thing say steel, sugar, cloth , cement or anything else is entitled to get initial deprecation on generators installed in their factory, then there is no reason to deny initial deprecation to an assessee who is  engaged in generation of electricity  which is used in manufacture or production of other articles and things, though by others.  This aspect can also be forcefully argued by the assessee in case the revenue prefer appeal before the high court against the order of Tribunal.

Earlier articles about initial deprecation:

Readers may also  read  other articles written by the author and  webhosted on this website about nature of  initial deprecation  in which the author had taken considered view that initial depreciation should be  fully allowed (20%) in the first year and it should not be deducted from cost to determine WDV so that the purpose of incentive is fully achieved.