Section 32(1)(iia) of the Income Tax Act,1961 ('Act' for short) provides that in the case of new machinery of plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2002, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii). Such further deduction of fifteen per cent shall be allowed to-
* a new industrial undertaking during any previous year in which such undertaking begins to manufacture or produce any article or thing on or after the 1st day of April, 2002; or
* any industrial undertaking existing before the 1st day of April, 2002, during any previous year in which it achieves the substantial expansion by way of increase in installed capacity by not less than ten per cent.
As far as application of Sec.32 (1)(iia) of the Act is concerned, what is required to be satisfied in order to claim the additional depreciation is that the setting up of a new machinery or plant should have been acquired and installed after March 31, 2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed after March 31, 2002, should have any operational connectivity to the article or thing that was already being manufactured by assessee.
The above view has been confirmed by the Madras High Court in two cases. In 'Commissioner of Income Tax V. Hi Tech Arai Ltd.,' - (2010) 321 ITR 477 (Mad) the assessee is engaged in the business of manufacture of oil seeds, moulded rubber parts, red value assemblies apart from generation of power. The assessee has set up two wind mills in addition to the already existing four wind mills and thereby increased its power generation capacity by above 50 per cent. The assessee claimed additional depreciation for the new wind mills.
The Assessing Officer has disallowed the claim of the assessee on the ground that the assessee is basically generating the electricity by wind mills for its own consumption and it is not the business of the assessee. Therefore the assessee is not entitled for additional depreciation for wind mills, under Section 32(1)(iia). The Commissioner (Appeals) has allowed the claim of the assessee on the ground that it is not essential that the assessee is in the business of generation of electricity. But, since the assessee is generating the electricity by windmills, the conditions of the law are fulfilled for claiming additional depreciation. It is an undisputed fact that after addition of two units during the period relevant to the assessment year, the capacity of generation of power through wind mills was enhanced by 50 per cent.
The Revenue being failed in the Appellate tribunal also came to High Court raising the following substantial questions of law:
* Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in holding that the assessee is entitled to additional depreciation on the purchase of wind mills even though the main business of the assessee is not producing or generating of electricity?
* Whether on the facts and circumstances of the case, the Tribunal was right in allowing additional depreciation under Section 32 (1) (iia) wind mill amounting to Rs.33,29,562/- and Rs.37,28,824/- respectively for assessment years 2003-04 and 2004-05 was proper?
* Whether the Tribunal was right in not considering the judgment of a co-ordinate Chennai Bench passed in the case of 'Texmo Industries' which is binding on it and in favor of the Revenue;
* Whether the new machinery or plant purchased is eligible for additional depreciation or only those plants and machinery purchased and used in its main business the exemption contemplated under Section 32(1) (iia) is to be given?
The Revenue contended the following:
* The Tribunal under similar circumstances earlier disallowed the additional depreciation claimed under Section 32 (1)(iia) of the Income Tax Act, whereas by the impugned order, the Tribunal has taken a diametrically opposite view and on this ground itself the order is liable to be set aside;
* The additional depreciation was claimed on the setting up of wind mills for generation of power and inasmuch as the assessee is only engaged in the manufacture of oil seeds etc., the setting of a wind mill has absolutely no connection for the manufacture of oil seeds, which is a power industry and, therefore, the assessee was not entitled to claim the additional depreciation as allowed under section 32 (1) (iia) of theAct;
The High Court held that as follows:
* As far as the first contention is concerned, when the Tribunal by the impugned order has applied section 32(1)(iia) of the Act, to the facts involved in the case of the assessee and has found that the assessee is entitled for the additional depreciation claimed under the said provision, it cannot be held that simply because a co-ordinate Bench of the Tribunal had earlier taken a different view, the Tribunal on this occasion also ought to have followed the same. When the Tribunal has applied the law correctly in the impugned order, there is no gainsaying that there was an earlier order by the co-ordinate Bench and therefore, for that reason, this time also the Tribunal should have blindly followed its own earlier decision even if such earlier decision did not reflect the correct position of the law.
* The provisions of section 32 (1)(iia) does not state that the setting up of a new machinery or plant, which was acquired and installed after March 31, 2002, should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore the contention that the setting up of a wind mill has nothing to do with the power industry, namely, manufacture of oil seeds, etc., is totally not germane to the specific provision contained in section 32 (1) (iia) of the Act.
In 'Commissioner of Income Tax V. Texmo Precision Castings' - (2010) 321 ITR 481 (Mad) the assessee is carrying on the business of investment castings for export and also generating and selling electricity from the wind mill. During the assessment year the Assessing Officer disallowed the additional depreciation claim made by the assessee on the view that the assessee was carrying on the business of manufacturing investment castings. The investment castings are products which are produced with high precision using lost wax process and the same was used in various applications like orthopedic implements, tin and can openers, water pipe joints etc., and installation of new wind mill has not in any way increased the installed capacity of the assessee's plants and accordingly disallowed the additional depreciation. The Commissioner of Income tax (Appeals) also disallowed the claim of the assessee on the ground that the investment in the windmills is clearly one for the purpose of saving electricity charges and their installation has in no way increased the installed capacity of the investment casting manufacturing business.
The Tribunal relied on its own decision in the case of 'Hi-Tech Arai Ltd.,' and gave relief the assessee. The Revenue filed appeal before the High Court. The High Court held that the issue was already decided in favor of the assessee and against the Revenue in the 'Hi-Tech Arai Ltd.,' (supra) judgment, it did not require no interference of the impugned order.
By: Mr. M. GOVINDARAJAN - April 12, 2010
Discussions to this article
I think provisions of Sec.32(1)(iia) are not applicable to assessees falling/covered under Sec.32(1)(i)if the assessee is an undertaking engaed in generation/distribution of Power/electricity as an independent unit and not as a captive unit of the assesee. The sec.32(1)(iia) clearly mentions that the add. dep. is available to assesee claiming dep. U/s 32(1)(ii).Pl.Give your opinion.