2019 (7) TMI 1047 - HC - Income Tax

High Court allows windmill depreciation claim for electricity generation, broadening 'used' interpretation. Assessee wins additional depreciation.

M/s. Tenzing Match Works Versus The Deputy Commissioner of Income Tax Circle I, Virudhunagar

The High Court reversed the Tribunal's decision to reject the depreciation claim on a windmill, determining that the windmill was indeed 'used' for ... Additional depreciation on the wind mill - passive use of machinery - period of trial run - as per assessee said wind mill was commissioned as well as started generation of electricity based on the materials placed on record - HELD THAT:- Even trial production machineries kept ready for use etc., were considered to be used for the purpose of business to qualify for depreciation. In “CIT -Vs- Geo Tech Construction [2000 (3) TMI 42 - KERALA HIGH COURT] , the machinery which was purchased by the assess from Pondicherry was yet to reach work site at Kochi and were in transit, and the Court held that it would amount to passive use and would qualify for depreciation. Thus, we are of the considered view that the Tribunal erred in reversing the order passed by the CIT (Appeals). For all the above reasons, the substantial question of law No.1 is answered in favour of the assessee. Claim of additional depreciation - generating entity on the basis of electricity is not an “article” or “thing”- HELD THAT:- Whether generation of electricity would fall within the ambit of business of manufacture or production of any article or not issue appears to be no longer res integra and decided in favour of the assessee in “CIT -Vs- NTPC [2019 (3) TMI 207 - DELHI HIGH COURT] . In the said case, the assessee was engaged in the production of thermal power and was held to be eligible to claim additional depreciation under Section 32(1)(iia). The Court took into consideration the decision of the Constitution Bench of the Honourable Supreme Court in “State of A.P. -Vs- NTPC [2002 (4) TMI 694 - SUPREME COURT] wherein the Apex Court held electricity to be “goods” for the purpose of sales tax. Electricity is capable of abstraction, transmission, transfer, delivery, possession, consumption and use like any other movable property. Following the same logic, to deny the benefit of additional depreciation to generating entity on the basis of electricity is not an “article” or “thing”, is an artificially restrictive meaning of the provision and the benefit of additional depreciation under Section 32(1)(iia) has to be granted to the assessee. This decision will fully apply to the facts of the present case and consequently, it has to be held that the assessee is entitled for additional depreciation as well. Accordingly, the substantial question of law No.2 is also answered in favour of the assessee. Issues Involved:1. Rejection of claim for depreciation on the windmill.2. Rejection of claim for additional depreciation.Detailed Analysis:Issue 1: Rejection of Claim for Depreciation on the WindmillThe primary issue revolves around whether the windmill was 'used' for the purpose of business within the meaning of Section 32(1)(iia) of the Income Tax Act, 1961. The Tribunal had rejected the depreciation claim on the grounds that the windmill had not generated significant electricity before the end of the assessment year 2005-06, and thus, could not be considered as being used for business purposes.The Tribunal relied on several precedents, including:- *The Deputy CIT vs. Yellamma Dasappa Hospital (2007 290 ITR 353 Kar)*: The machinery was not put to actual use.- *CIT vs. Maps Tours and Travels (2003 260 ITR 655 Mad)*: No evidence of usage of the purchased cars.- *Dineshkumar Gulabchand Agrawal vs. CIT (2004) 267 ITR 768 (Bom)*: Depreciation claimed on machinery kept ready for use but not actually used.- *B.Malini and Co. vs. CIT (1995) 214 ITR 192 (Bom)*: A gap of one year between installation and usage.However, the High Court found these cases inapplicable to the present case due to different factual scenarios. The Court emphasized the certificate from the Tamil Nadu Electricity Board, which confirmed the windmill generated electricity on 31.03.2005, albeit a small amount (0.080 units). The Court referred to several other decisions to support the broader interpretation of 'used':- *Principal CIT vs. Larsen & Toubro Ltd., 403 ITR 248 (Bom)*: Trial production machinery qualifies for depreciation.- *CIT vs. Escorts Tractors Ltd 56 Taxmann.com 333 (Delhi)*: Machinery kept ready for use qualifies for depreciation.- *CIT vs. Southern Petrochemical Industries Corporation Ltd 311 ITR 202 (Mad)*: Depreciation on standby spare parts allowed.- *CIT vs. Geo Tech Construction 244 ITR 452 (Kerala)*: Machinery in transit considered as passive use, qualifying for depreciation.The Court concluded that the windmill was indeed 'used' for business purposes as it was ready and capable of generating electricity, thus qualifying for depreciation. The Tribunal's decision to reject the depreciation claim was reversed.Issue 2: Rejection of Claim for Additional DepreciationThe Tribunal had also rejected the claim for additional depreciation on the grounds that the primary depreciation claim was denied. The CIT (Appeals) had similarly rejected the claim based on a prior Tribunal decision, which was later reversed.The Court examined whether the assessee, engaged in the business of generating power, was entitled to additional depreciation under Section 32(1)(iia). The Revenue argued that the assessee's primary business was manufacturing safety matches, and establishing a windmill was a new line of business. However, the Court referred to *CIT vs. Hi Tech ARAI Ltd., (2010) 236 CTR 0321*, which clarified that the new machinery or plant need not have operational connectivity to the existing business for additional depreciation.The Court further cited *CIT vs. NTPC (2019) 103 Taxmann.com 398*, where it was held that generating electricity qualifies as manufacturing or production of an article, thus entitling the assessee to additional depreciation. The Supreme Court's decision in *State of A.P. vs. NTPC AIR 2002 SC 1895* was referenced, affirming that electricity is 'goods' for sales tax purposes, supporting the broader interpretation of manufacturing.The Court concluded that the assessee was entitled to additional depreciation, reversing the Tribunal's decision. Both substantial questions of law were answered in favor of the assessee, and the appeals were allowed.