2016 (8) TMI 1156 - HC - Income Tax

Court upholds additional depreciation for windmill; disallows PF & ESI contributions.

The Principal Commissioner of Income Tax -4, Chennai Versus M/s. Kanishk Steel Industries

The Principal Commissioner of Income Tax -4, Chennai Versus M/s. Kanishk Steel Industries - TMI Issues Involved:1. Entitlement to additional depreciation on windmill under Section 32(1)(iia) of the Income Tax Act, 1961.2. Disallowance of Employees' Provident Fund (PF) and Employees' State Insurance (ESI) contributions.Issue-wise Detailed Analysis:1. Entitlement to Additional Depreciation on Windmill:The primary issue in this case revolves around whether the assessee, engaged in the manufacture of iron and steel products, is entitled to additional depreciation on a windmill installed during the financial year 2005-06. The assessee claimed additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961, arguing that the windmill was used for captive consumption in their manufacturing activity, thus qualifying for the depreciation.The appellate authority and the Tribunal both relied on the precedent set by the High Court in CIT v. VTM Ltd., reported in 319 ITR 336 (Mad.), which held that additional depreciation is allowable for new machinery or plant acquired and installed after 31.03.2002 by an assessee engaged in manufacturing, irrespective of whether the new machinery or plant has operational connectivity to the existing manufacturing activities. The Tribunal confirmed the appellate authority's decision, stating that the electricity generated by the windmill used for captive consumption in manufacturing qualifies for additional depreciation.The revenue's appeal raised two substantial questions of law:(i) Whether the assessee is entitled to additional depreciation on the purchase of windmills when their main business is not producing or generating electricity.(ii) Whether the benefit of additional depreciation on power generation applies only from assessment year 2013-14 onwards, as per the amended provisions effective from 01.04.2013.The High Court, referencing its earlier judgments in CIT v. Hi-Tech Arai Ltd., reported in 321 ITR 477 (Mad.), CIT v. Texmo Precision Castings, reported in 321 ITR 481 (Mad.), and M.M. Forgings Ltd. v. Additional Commissioner of Income-Tax, reported in 349 ITR 673 (Mad.), upheld the Tribunal's decision. These precedents consistently held that additional depreciation is allowable for new machinery or plant installed by an assessee engaged in manufacturing, without requiring operational connectivity to the existing manufacturing activities.2. Disallowance of Employees' Provident Fund (PF) and Employees' State Insurance (ESI) Contributions:The second issue concerns the disallowance of the assessee's claims for PF and ESI contributions. The Commissioner of Income-Tax (Appeals) observed that the payments towards Employees' Contribution to PF and ESI are governed by Section 36(1)(va) of the Income Tax Act and not by Section 43B. Consequently, the appellate authority disallowed the contributions of Rs. 25,208 towards PF and Rs. 6,800 towards ESI.The Tribunal upheld this disallowance, and the High Court did not find any reason to interfere with the Tribunal's decision. The revenue's appeal did not specifically challenge this aspect, focusing instead on the issue of additional depreciation.Conclusion:The High Court dismissed the revenue's appeal, affirming the decisions of the appellate authority and the Tribunal. The Court concluded that the assessee is entitled to additional depreciation on the windmill under Section 32(1)(iia) and upheld the disallowance of PF and ESI contributions. The judgment reiterates the principle that additional depreciation is allowable for new machinery or plant installed by an assessee engaged in manufacturing, without requiring operational connectivity to the existing manufacturing activities.