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2016 (1) TMI 412 - ITAT DELHI

2016 (1) TMI 412 - ITAT DELHI - TMI - Disallowance of statutory claim for deduction of additional depreciation u/s 32(1)(iia) - power turbines employed for generation of power for captive consumption in the business of manufacturing of steel and iron products - Held that:- 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 Learned CIT(Appeals) is reversed to this extent and the disallowance .....

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e company is engaged in the manufacturing and selling of Sponge Iron, Billets which are used for making steel at its works at Raigharh in the State of Chhattisgarh. During the year, the assessee company also started operation of power at its plant for captive consumption of power. The return of income was filed on 21.10.2005 declaring an income of ₹ 4,51,27,183/- under the normal provisions of the Income-tax Act, 1961 (hereinafter the Act ) and book profit of ₹ 82,97,30,572/- u/s 115 .....

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al depreciation of ₹ 5,64,30,426/- and disallowance u/s 14A of the Act of ₹ 1,20,540/-. 3. Aggrieved, the assessee preferred an appeal to the first appellate authority. The CIT (A) upheld the disallowance of additional depreciation made by the AO and also while upholding the disallowance u/s 14A made by the AO, he increased the disallowance to ₹ 2,26,000/- (i.e. ₹ 1,20,540/- made by AO + ₹ 1,05,460/- enhanced by the CIT (A) = ₹ 2,26,000/-). 4. The assessee, be .....

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arned Commissioner of Income Tax (Appeals)-XVI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in not appreciating the fact of increase in installed capacity of sponge iron and billets by 676121 MT during the previous year as per statement of installed capacity of turbine generator. 3. That the Learned Commissioner of Income-tax (Appeals) -XVI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in re-computing disallowance u .....

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n the business of manufacturing of steel and iron products. 6. Brief facts relating to Ground No.1 are that the company had set up a two units lower plants of 8MW each which commenced the generation of power on 27.05.2004 and 1st August, 2004 and for this purpose, the purchased equipments of ₹ 37,86,62,841/- and claimed additional depreciation on the same. The AO observed that in view of the provisions of section 32(1)(iia), since the assessee was engaged in generation of power, the same w .....

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gible, could be handled/touched and could be stored but the electricity or energy being intangible was not capable of being subjected to physical handling or storage, hence by no means energy could be considered as article or thing . He observed that this distinction between the manufacturing undertaking and undertakings engaged in generational power was maintained throughout in the income tax legislation. According to AO, this fact become further evident if one went through the various deductio .....

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AT Chennai Bench in the case of Tamilnadu Chlorates vs. JCIT (2006) 98 ITD 1 (Chennai), the AO held that the benefit of additional depreciation was not available to the undertakings engaged in generation of power and made the aforesaid disallowance. 6.1 The assessee filed an appeal before the CIT (A) on this issue and the CIT (A), after discussing the provisions of section 32(1)(iia) and the case laws relied upon by the assessee, upheld the order of the AO. 6.2 The assessee, being aggrieved, cam .....

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s below. 9. We have heard both the sides on the issue and perused the material available on record. We find that the AO and CIT (A) disallowed the additional depreciation claimed by the assessee with a finding that the assessee was engaged in generation of power and the same was not eligible for claim of additional depreciation in view of the express provisions of section 32(1)(iia) of the Act. Our attention has been taken to the decision of the Tribunal in NTPC Limited vs. DCIT in ITA No.1438/D .....

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roduction of article or thing because article or thing in common parlance is known as something tangible and moveable etc. The Commissioner was of the view that wherever a deduction is granted for power generation undertaking, a separate mechanism has been provided under the Act. He noted that section 32(1)(vi) (as stood prior to 01.04.1998) provided for additional depreciation but that it categorically specified both businesses i.e. generation of power and manufacture of production or an articl .....

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tasked by law to regulate the tariff of electricity generating companies owned or controlled by the Central Government. NPTC has issued total sales bills of ₹ 23,066.30 crores to its customers in terms of CERC s existing norms. CERC s final norm fixation order was not made during the year. Yet NTPC revised the sales downwards to ₹ 22,128 crores and did not take into account a sum of ₹ 938.30 crores. According to the Commissioner, AO permitted this without any inquiry. On the af .....

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t aside the orders of the authorities below and restored the order of the AO. Thus, the additional depreciation granted by the AO stood restored. In the light of the aforesaid facts of the matter and that too for assessment year 2005-06, which is relevant assessment year before us, we concur with the view that has been taken by the Tribunal while upholding the claim of the assessee in respect to the additional depreciation in the field of power generation. The Coordinate Bench of the Tribunal s .....

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owing this depreciation. On merit, Ld. Commissioner has observed that assessee is engaged in the activity of generation of power. Section 32(1)(iia) of the Act provides additional depreciation to those undertaking which are engaged in the business of manufacture or production of any article or thing. According to the Learned Commissioner, other businesses are not eligible to claim the benefit. He observed that generation of power cannot be equated with the production of article or thing because .....

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sessee in order to appraise us the meaning of expression manufacture and production made reference to the decision of Hon'ble Supreme Court in the case of Sesa Goa Ltd. and India Cine Agency (supra) 18. In the case of India Cine Agency, Hon'ble Supreme Court has considered the judgment rendered in the case of Sesa Goa (supra) and all other decisions on the point which contemplate the meaning of expression manufacture as well as production . The relevant discussion made by the Hon ble Cou .....

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whether by hand labour or machine". Thus by process of manufacture something is produced and brought into existence which is different from that, out of which it is 26 made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. (See Dy. CST (Law), Board of Revenue (Taxes) Coco Fib .....

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iginal commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in rel .....

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ocess processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. (See Collector of Central Excise v. Rajasthan State Chemical Works [1991] 4 SCC 473). x x x x x x x x x x x x x x x x x x x x x x 7. To put it differently, the test to determine whether a particular activity amounts to "manufacture or not is: Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a ne .....

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ng its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Ltd. v. Union of India [1985] 3 SCC 314). x x x x x x x x x x x x x x x x x x x x x x 19. In this case, assessee was carrying on business of conversion of Jumbo Rolls of photographic films into small flats and rolls in desired sizes. It claimed deduction under sec. 80-HH and 80-I as well as investment allowanc .....

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decisions of the Hon'ble Supreme Court or Hon'ble High Court is to the effect that broadly manufacture is a transformation of an article, which is commercially different from the one which is converted. It is a change of one object to another for the purpose of marketability. It brings something into existence, which is different from that, which originally existed. The new product is a different commodity physically as well as commercially. The Hon ble Court also explained broader test .....

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by the assessee cannot be equated with an article or thing which is being 29 manufactured in an industrial undertaking. The learned counsel for the assessee in order to buttress his arguments, power/electricity generated by the assessee is an article or goods, made reference to the decision of Hon'ble Supreme Court in the case of CST Vs. MP Electricity Power. In this case, the MPEST Board sold, supplied and distributed electric energy to various consumers. It also sold coal-ash, a waste pro .....

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neral Sales-tax Act, 1958, in respect of its activity of generation, distribution, sale and supply of electric energy? 20.1 In order to decide whether Madhya Pradesh Electricity Board is a dealer or not, Hon ble Court took into consideration the definition of dealer as given in the two acts referred in the question and observed that the definition contemplates that any person who carries on the business of buying, selling, supplying or distributing the goods as a dealer . The 30 expression goods .....

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as examined whether electricity can be termed as a goods. The discussion made by the Hon ble Court in the judgment reads as under: The reasoning which prevailed with the High Court was that a well defined distinction existed between the sale or purchase of goods and consumption or sale of electricity; otherwise there was no necessity of having Entry No.53. But under Entry 53 taxes can be levied not only on sale of electricity to derive much assistance from the aforesaid entries. What has essenti .....

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gy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot be cease to be movable 31 property when it has all the attributes of such property. It is needless to repeat that it is capable of abstraction, consumption and use which, if done dishonestly, would attract punishment under sec. 39 of the Indian Electricity Act, 1910. It can be transmitted, transferred, delivered stored, possessed etc. in the same way as any other movable property. Even in Ban .....

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ent of sales tax by making a provision for it in the Schedules to the two Acts. It cannot be denied that the Electricity Board carried on principally the business of selling, supplying or distributing electric energy. It would therefore clearly fall within the meaning of the expression dealer in the two Acts . 20.2 This question again fallen for the consideration of the Hon'ble Supreme Court in the case of State of Andhra Pradesh Vs. NTPC. The dispute in this case was that respondent NTPC ha .....

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ucer shall subject to certain exceptions pay every month to the State Government a duty calculated at the rates specified in the table appended thereto on the units of electric energy sold or supplied to a consumer or consumed by himself for his own purpose or for the purpose of his township or colony during the preceding months. Similar steps were taken by the Madhya Pradesh Government for the plants situated in its territorial jurisdiction. The question arose whether electricity sold to other .....

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tion 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 sales-tax cannot be taken in a narrow sense and merely because 33 electricity energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot be c .....

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is 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 e .....

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433, 442, 11 NW 894, where the court, quoting from the same authority, said, We 34 are totally ignoran of the nature of this cause whether it be a material agent or merely a property of matter. But as some hypothesis is necessary for explaining the phenomena observed, it has been assumed to be a highly subtle, imponderable fluid, identical with lightning, which pervades the pores of all bodies, and is capable of motion from one body to another. This characteristic quality of electric energy was .....

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d to the substation installed at the units of the consumers through electrical higher-tension transformers and from there electricity is supplied to the meter. But the moment electricity is supplied through the meter, consumption and sale simultaneously take place. as soon as the electrical energy is supplied to the consumers and is transmitted through the meter, consumption takes place simultaneously with the supply. There is no hiatus in its operation. Simultaneously sale also takes place. The .....

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y meaning. Thereafter Hon ble Court has observed that goods means, all kind of moveable properties. The terms moveable property when considered with reference to goods as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because electric energy is not a 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 properties. It is capable of abstraction, consumpt .....

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ns of the Income-tax Act, 1961, he simply construed the meaning of electricity as not article or thing on the basis of his own inference drawn from the nature of 36 this item but if we evaluate the conclusion drawn by the Learned Commissioner in the light of the decision of the Hon'ble Supreme Court given in the case of Indian Cine Agency, CST Vs. M.P. Electricity Board and State of Madhya Pradesh Vs. NTPC then it would suggest that electric energy has all trapping of an article or goods. Th .....

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, Chennai and the judgment of the Hon'ble Supreme Court in the case of NC Budhiraja. As far as the judgment of the Hon'ble Supreme Court in the case of N.C. Budhiraja is concerned that has been considered by the Hon'ble Supreme Court itself in the case of Indian Cine Agency (supra). The ITAT in the case of Tamilnadu Chlorates has considered the admissibility of deduction under section 80-HH and in that test held that electricity is not an article. The ITAT has not dealt with these tw .....

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