Power company wins right to claim 20% additional depreciation on electricity generation assets

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Case Name

Principal Commissioner of Income Tax, Kolkata vs M/s. Damodar Valley Corporation (High Court of Calcutta)

ITAT/172/2017 IA No.GA/2/2017 (Old No.GA/1455/2017)

Date: 17th November 2021

Key Takeaways

• Power generation companies are entitled to additional depreciation under Section 32(1)(iia) of the Income Tax Act
• Electricity is legally considered “movable property” for tax purposes
• Multiple High Courts have consistently ruled in favor of power companies on this issue
• The decision reinforces that manufacturing electricity qualifies for additional depreciation benefits
• Revenue’s appeal was completely dismissed

Issue

The central legal question was: Is a company that generates electricity from thermal power entitled to additional depreciation at the rate of 20% under Section 32(1)(iia) of the Income Tax Act?

Facts

• Damodar Valley Corporation is a company that generates electricity from thermal power
• For the assessment year 2011-12, they claimed additional depreciation at 20% under Section 32(1)(iia)
• The Assessing Officer initially allowed this claim without detailed inquiry
• The Commissioner of Income Tax later invoked Section 263, calling the original assessment “erroneous and prejudicial to revenue”
• The case went through various levels - from the Commissioner to the Income Tax Appellate Tribunal, and finally to the High Court
• The revenue department argued that this additional depreciation provision only came into effect from April 1, 2013 (assessment year 2013-14), not 2011-12

Arguments

Revenue’s Arguments:

• The Tribunal wrongly allowed 20% additional depreciation under Section 32(1)(iia)
• The Assessing Officer granted this benefit without proper inquiry
• The assessment was erroneous and prejudicial to revenue interests
• The provision for additional depreciation only became effective from assessment year 2013-14

Assessee’s Arguments:

• As a power generation company, they are entitled to additional depreciation
• Electricity generation constitutes manufacturing activity
• They should benefit from the additional depreciation provisions available to manufacturing companies

Key Legal Precedents

The court relied on several important precedents:

1. State of Andhra Pradesh vs National Thermal Power Corporation (2002) 5 SCC 203 - The Supreme Court held that electric energy can be transmitted, transferred, delivered, stored, and possessed in the same manner as movable property
2. Commissioner of Sales Tax, Madhya Pradesh, Indore vs Madhya Pradesh Electricity Board, Jabalpur (1969) 1 SCC 200 - Earlier Supreme Court decision establishing electricity as movable property
3. Commissioner of Income Tax, Kolkata-I vs Ankit Metal and Power Limited (2016) 66 taxmann.com 367 (Calcutta) - This court’s own decision supporting additional depreciation for power companies
4. CIT vs Hi-tech Arai Limited (2010) 321 ITR 477 (Madras) and CIT vs VTM Ltd (2009) 319 ITR 336 (Mad) - Madras High Court decisions supporting power companies’ right to additional depreciation
5. PCIT, New Delhi vs NTPC SAIL Power Co. (P.) Ltd. (2019) 103 taxmann.com 398 (Delhi) - Recent Delhi High Court decision supporting the same principle

Judgement

The assessee (Damodar Valley Corporation) won completely.

Court’s Reasoning:

• The court found that electricity generation constitutes manufacturing activity
• Since electricity is legally considered movable property, companies generating it are entitled to additional depreciation
• Multiple High Courts have consistently ruled in favor of power companies on this issue
• The precedents clearly establish this right

Orders Made:

• The revenue’s appeal was dismissed
• The substantial question of law was answered against the revenue
• Since the core issue was decided in favor of the assessee, the court didn’t need to address whether the Commissioner’s action under Section 263 was justified
• The stay application was also closed

FAQs

Q1: What is additional depreciation under Section 32(1)(iia)?

A: It’s a special tax benefit that allows certain companies to claim an extra 20% depreciation on their assets, over and above the normal depreciation rates.

Q2: Why did the revenue department challenge this?

A: They believed the power company wasn’t entitled to this benefit and that allowing it was prejudicial to government revenue.

Q3: Is this decision final?

A: This appears to be a High Court decision. The revenue could potentially appeal to the Supreme Court, but given the consistent rulings across multiple High Courts, it’s unlikely to succeed.

Q4: What does this mean for other power companies?

A: Other power generation companies can rely on this decision to claim similar additional depreciation benefits, as it reinforces a well-established legal principle.

Q5: Why is electricity considered “movable property”?

A: The Supreme Court has ruled that electricity can be transmitted, transferred, delivered, and stored like other movable goods, making it legally equivalent to movable property for tax purposes.

This appeal of revenue filed under Section 260A of the Income Tax Act (the ‘Act’ in brevity) is directed against the order dated 15th September, 2016 passed by the Income Tax Appellate Tribunal, B-Bench, Kolkata (the ‘Tribunal’) in ITA No.1458/Kol/2015 for the assessment year 2011-12.

The revenue has framed the following substantial questions of law for consideration :

“a) Whether on the facts and in the circumstances of the case the Learned Income Tax Appellate Tribunal, “B” Bench, Kolkata, has erred in law in allowing the additional depreciation @20% under Section 32(1)(iia) which was allowed by the A.O. without any enquiry?

b) Whether on the facts and circumstances of the case the Learned Income Tax Appellate Tribunal, “B” Bench, Kolkata, has erred in law in quashing the order passed by the Ld. CIT u/s 263 of the I.T. Act, 1961, by disregarding that the assessment order of the A.O. was erroneous and prejudical to the interest of the Revenue in allowing the claim of depreciation u/s 32(1)(iia) in A.Y. 2011-12 which came into effect from 1st April, 2013, i.e. from the A.Y. 2013-14?”

We have heard Mr. Tilak Mitra, learned counsel for the appellant assisted by Mr. Soumen Bhattacharjee, learned advocate and Mr. Rahul Tangri, learned counsel for the respondent assisted by Mr. Deepro Sen, learned advocate.

The short question involved in this appeal is whether the respondent/assessee which generates electricity from thermal power

is entitled for additional depreciation at the rate of 20% under

Section 32(1)(iia) of the Act. The substantial question which

needs to be considered is whether the initiation of proceedings

under Section 263 of the Act was justified? If we answer the

first question of law in favour of the assessee, then the

necessity to answer the second question may not arise as it would

become academic. We need not answer the first question of law as

there are various decisions of the Hon’ble Supreme Court as well

as other High Courts including this Court. In the State of Andhra

Pradesh vs. National Thermal Power Corporation (2002)5 SCC 203,

the Hon’ble Supreme Court held that electric energy can be

transmitted, transferred, delivered, stored, possessed etc. in the

same state as movable property. The Hon’ble Supreme Court

followed its earlier decision in Commissioner of Sales Tax, Madhya

Pradesh, Indore vs. Madhya Pradesh Electricity Board, Jabalpur

1969(1)SCC 200. Therefore, the revenue cannot dispute the fact

that the electricity needs to be construed as a movable property

as it being capable of being transmitted and transferred etc.

The next issue is whether the respondent/assessee would be

entitled to additional depreciation under Section 32(1)(iia)? We

are guided by the decision of this Court in the case of

Commissioner of Income Tax, Kolkata-I vs. Ankit Metal and Power

Limited reported in (2016)66 taxmann.com 367(Calcutta). In the

said decision the Division Bench followed the decision of the High

Court of Madras in CIT vs. Hi-tech Arai Limited reported (2010)321

ITR 477 (Madras) and CIT vs. VTM Ltd. reported in [2009] 319 ITR

336 (Mad) and held that the assessee therein which was also

engaged in the activity of manufacturing of power is entitled for

additional depreciation under Section 32(1)(iia) of the Act. To

the same effect, there are several other decisions of other High

Courts and the latest being in the case of PCIT, New Delhi vs.

NTPC SAIL Power Co.(P.) Ltd. reported in [2019]103 taxmann.com 398

(Delhi).

In the light of the above, we hold that the

respondent/assessee is entitled for additional depreciation under

Section 32(1)(iia) of the Act. For the reasons, the appeal filed

by the revenue is dismissed and the substantial question of law is

answered against the revenue.

As pointed out earlier, since the core issue has been

decided in favour of the respondent/assessee, the question whether

exercise of jurisdiction by the Commissioner under Section 263 of

the Act is justified or not is not required to be considered.

Accordingly, the appeal stands dismissed. The stay

application also stands closed.

(T.S. SIVAGNANAM, J.)

(HIRANMAY BHATTACHARYYA, J.)