By minimizing the operating expenses, rates can be lowered. In the case of Agarwal Transformers P.Ltd the Tribunal allowed higher depreciation @ 30% on the reasoning that generator is a renewable energy device. Property registration not must for constituting ‘Transfer’ as per pre-amended section 53A of TPA Act, No TDS on discount/rebate allowed to dealers/distributors on sale of products, Non Woven Bags manufactured through intermediate product Non Woven fabric classifiable under Heading No. If the correct curve and average service life is chosen for a specific type of utility asset (e.g. In CIT’s opinion the assessee’s business of generation of power could not be equated with the connotation of “production of an article or thing”. 247,36,00,558. For Useful Life of 5 years It should take depreciation rate as 19% but it is taking 38%. Hence it is undisputed that transformation from mere coal to electricity and from mere water to electricity happens pursuant to the manufacturing process and the electricity so produced or generated becomes a separate marketable commodity. The Court observed that when there can be sale and purchase of electricity then they did not see any reason as to why electricity would not be assumed to be “goods” The Supreme Court therefore held that “electricity” comes within the purview of the term “goods” and therefore sale of electricity came within the taxing provisions of the sale of goods Act so as to attract levy of sales tax. However, with regard to the issue of allowing additional depreciation under section 32(1)(iia) the Tribunal found that the assessment order did not suffer from any infirmity. Depreciation effectively turns the cost of the asset into a company expense. The learned CIT issued show cause notice dated 31-7-2015 seeking to revise the assessment framed under section 143(3) of the Act in as much as the learned assessing officer had granted the claim of additional depreciation to the assessee company in the sum of Rs. Copyright © TaxGuru. The treatment of depreciation as an indirect cost is the most common treatment within a business. The Supreme Court observed that the term “goods” has to be understood in a wider sense and merely because electric energy is not tangible or cannot be moved does not cease to be “goods”. This matter was further carried by the revenue to the Hon’ble Calcutta High Court which was dismissed by the Hon’ble Calcutta High Court in the case of CIT v. Ankit Metal & Power Ltd. (2015) 972 ITR 660 (Cal.). The assessee also submitted that no appeal was preferred by the revenue to the Hon’ble Delhi High Court against the order of the Delhi Tribunal supra. All Rights Reserved. Therefore, the determination of how quickly to recover the investment through depreciation will greatly impact ratepayers and the utility. Both extremes carry pros and cons for utilities and consumers, and only the development of a reasonable depreciation rate will properly balance the interests. Here we will consider in more detail how the depreciation of assets is dealt with in your company accounts and the ultimate effect that it has on your bottom line. ), Dy. Reserve is created by transferring from the Revenue Account every year an amount equivalent to not less than 1/4 per cent and not more than 1/2 per cent of the original cost of the fixed assets until it equals 5 per cent of the original cost of the fixed assets. New Delhi, 29th March, 1994. Thereafter it was selected for scrutiny through CASS and the case was completed under section 143(3) by JCIT, Ranqe-9, Kolkata on 28-3-2014 determining total income of Rs. For that on the facts and in the circumstances of the case, in the assessment order passed under section 143(3) while allowing deduction for additional depreciation under section 32(1)(iia) the assessing officer having followed one of the course permissible in law, the CIT was unjustified in invoking his revisionary power under section 263 of the Act & holding the assessment to be erroneous. in books of accounts-reg, Gujarat HC rejects TAR/ITR due date date extension writ applications. If the company depreciates the asset over the 12 ... electricity, rates of depreciation prevail over the Schedule XIV to the Companies Act. Changing utility practices, market, technology, and regulatory forces can also alter even the best projections. On bare perusal of the said section it would be noted that an “eligible assessee” under section 32(1)(iia) is the one who “manufactures or produces any article or thing”. After due consideration of the facts and the question raised before it, the Hon’ble Madras High Court dismissed the revenue’s appeal by holding that the assessee engaged in the business of generation of power fulfilled the condition of production of any article or thing as contemplated in section 32(1)(iia) of the Act and accordingly eligible for additional depreciation. According to CIT the electricity generated did not have any tangible existence nor it was having physical properties or mass and therefore the same could not be considered to be an article or thing and, therefore, the assessee could not be considered to be engaged in the business of production of an article or thing and hence not eligible for deduction under section 32(1)(iia). The legislature in its wisdom thought it fit to bring in a specific amendment with effect from assessment year 2013-14 in order to confer the benefit of additional depreciation under section 32(1)(iia) of the Act for the assessees engaged in the business of generation and distribution of power and the same cannot be held to be retrospective in operation. Contact us to speak with one of our advisors. In the said order the CIT held the assessing officer’s order granting additional deprecation to be erroneous on the ground that the assessee was not engaged in the business of manufacture or production of any article or thing. 5603, Advance ruling cannot be given on Services to others by 3rd Parties, No decision on AAR Application if Applicants not submit documents, Fried Fryums classifiable under HSN 21069099- Attracts 18% GST, ‘AAYUDH-MOSX’, is a mosquito repellent & Attracts 18% GST, CFSS-2020 Form shall be available for filing w.e.f 16.01.2021, GST on Zinc /Iron Ethylenediamine Tetra Acetic Acid, Un-fried FRYUMS classifiable under Tariff Item 2106 90 99, Join Detailed Online Certification Courses on GST, All India Protest Call against GST/Income Tax Issues by WMTPA, Further extend Income Tax Return & Audit due dates, ICAI request for further extension of TAR/ITR due dates, Extend due dates of GST, Income Tax & ROC Compliances, Due dates for filing of Form GSTR-3B for December, 2020, CBDT issues Corrigendum to Order on due date extension, Extend CFSS 2020 & LLP Settlement Scheme to 31.03.2021. In the circumstances, the assessee who is desirous of claiming the additional depreciation need only to prove that during the relevant year he was engaged in the business of manufacture or production of any article or thing. 3. To accommodate these complexities, depreciation models have been developed combining both analysis and professional judgment to produce rational and supportable depreciation rate projections. Join our newsletter to stay updated on Taxation and Corporate Law. Maintained by V2Technosys.com, Appeal Number : IT Appeal No. Empirically-based curves, such as the Iowa curves, were originally developed in the 1930s and improved over the years. 6.4. In case WDV method opted, it will be done same as it is done for normal assessee In case SLM Method followed:- If Selling price is less than WDV Value, difference is written of as terminal depreciation If Selling Price > WDV (but less than actual cost),then difference is PGBP Income u/s 41 If Selling Price>Actual Cost ,then If a business employs a usage-based depreciation methodology, then depreciation will be incurred in a pattern that is more consistent with a variable cost. The model is designed to adapt to the different quantity and detail of data our clients have available in order to utilize the depreciation system that will produce the most accurate results. The assessee replied to the learned CIT in response to show cause notice that section 32(1)(iia) has come in force with effect from 1-4-2005 provides that any assessee which is engaged in the business of manufacture or production of any article or thing is entitled to claim additional depreciation @ 20% of the actual cost in respect of new machinery or plant acquired and installed in the relevant previous year. Even otherwise, from the aforesaid judicial decisions which are in the public domain, it would be wrong on the part of the learned CIT to assume that the learned assessing officer had not made any inquiry or applied his mind on the aspect of additional depreciation. Income Tax Depreciation is used in India to write off an asset used for business purpose over its life time and charge it to … He argued that no opportunity was given by the learned CIT to the assessee to put forth its arguments on the said aspect of ‘lack of inquiry’ thereby violating the mandate of section 263(1) of the Act. The Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 248 ITR 83 (SC) at page 88 held as follows :–, ‘The phrase “prejudicial to the interest of the Revenue” has to be read in conjunction with an erroneous order passed by the assessing officer. The revenue requirement formula is the basis of the utility rates we pay to charge our smart phone, heat our home, cook our dinner, and water our lawn. For that on the facts and in the circumstances of the case, the CIT was grossly unjustified in law and on facts in directing the assessing officer to reassess the taxable income of the appellant after making further inquiries even though the assessment order under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue within the meaning of section 263 of the Act. “1. If the cost of productionProduct CostsProduct costs are costs that are incurred to MACRS Solar Depreciation: James Keen has over 15 years experience as an engineering analyst and in complex regulatory proceedings, which includes electric, natural gas, oil and gas pipeline, water and wastewater, and refuse utilities. : Proceedings under section 263 of the Income Tax Act, 1961 in the case of M/s. 25. From the date this Schedule comes into effect, the carrying amount of the asset as … （ In the case, the real estate is owned by company, it can reduce the amount of corporate tax = Hojin zei. THE GAZETTE OF INDIA EXTRAORDINARY [PART II-SEC. FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-. NOTIFICATION. We hold that the learned CIT in concluding that lack of inquiry with regard to allow ability of additional depreciation on the part of the learned assessing officer would automatically make the order of learned assessing officer erroneous and prejudicial to the interest of the revenue, is palpably illegal in the facts and circumstances of the case in as much as no opportunity of hearing was given to the assessee in that regard. In order to submit a comment to this post, please write this code along with your comment: 769aff7bd8e6bec09ac4faec1a4f6487. 3(ii)] MINISTRY OF POWER. It is well settled that for the purpose of manufacture, an element of transformation is a pre- requisite. Though calculating a depreciation rate is simple in concept, the realities of utility operation, the significance of the result, the obscurity of the future, and the need to provide a rationale and supportable defense of the final rate introduces several complexities into the calculation. If asset is put to use for less than 180 days then amount equal to 50% of the amount calculated using normal depreciating rates is allowed as depreciation. In order to address the “prediction problem,” a commonly accepted solution is the use of the mortality curves that apply to utility plant. The CIT however revised the assessment order under section 263 of the Act. Often overlooked is the significance of the depreciation expense, the effect it can have on the rate base, and, therefore, the overall return on the utility’s investment. Conversely, insufficient depreciation expense will result in lower rates, decreased cash flow for the utility, and a greater return on the utility’s investment as the plant remains in rate base longer. Factory supervisors should be informed that no item of equipment should be retired from use without prior executive approval on a serially numbered retirement work order. The learned CIT issued show cause notice dated 31-7-2015 seeking to revise the assessment framed under section 143(3) of the Act in as much as the learned assessing officer had granted the claim of additional depreciation to the assessee company in the sum of Rs. In view of the ratio laid down in these judgments we submit that “electricity” is an article or thing an contemplated by section 32(1)(iia) of the Income Tax Act and therefore an assessee who generates such an article or thing comes within the ambit of section 32(1)(iia) because the process of generation of electricity is akin to production of an article which is separately marketable as a distinct goods. Different Methods of determining depreciation: Now we are going to discuss methods of determining depreciation and before that let us know what actually depreciation is.It is due to constant use of power plant equipment and building for many years there is a decrease in value of power plant.This is called depreciation of power plant. 6. In case of an electricity company, depreciation on assets is calculated based on the rates notified by (A) Companies Act 2013 (B) State Electricity Commission (C) Central Electricity Regulatory Commission (D) Income Tax Act 1961 40. 4.2. 28%) multiplied by the tax rates mentioned above (20% to 125%). If the asset is used for more than a period of 180 days, then the additional depreciation permissible is 17.5%. 3. This matter was further carried by the revenue to the Hon’ble Calcutta High Court which was dismissed by the Hon’ble Calcutta High Court in the case of CIT v. Ankit Metal & Power Ltd. (2015) 972 ITR 660 (Cal.). Room No. It is undisputed that no opportunity was afforded to the assessee in the instant case before us by the learned CIT to address on the aspect of ‘lack of inquiry’ on the allow ability of claim of additional depreciation. https://efinancemanagement.com/financial-accounting/depreciation Considering that Electricity generation, distribution & other costs (excluding Depreciation In order to provide this service to our utility clients, Aldrich is in the final stages of development of a data driven depreciation model. On perusal of the assessment record vis-a-vis the return and other document submitted it is seen that the assessee company had claimed additional depreciation @ 20% on additions made to plant and machinery at Thermal Power Station and Hydel Power Station. A basic principle to ratemaking is to only charge customers for assets that are used to provide them service. Estimating a precise service life and final salvage value of an asset, sometimes forty or more years in the future, verges on impossible. For that on the facts and in the circumstances of the case the appellant Corporation being engaged in the business of generation of power; was entitled to additional depreciation under section 32(1)(iia) since it was engaged in production of an article or thing and in that view of the matter was entitled to additional depreciation and hence order of assessment granting deduction for additional depreciation was not erroneous. (4) „Auditor‟ means an auditor appointed by a generating company or a transmission licensee, as the case may be, in accordance with the provisions of sections 224, 233B and 619 of the Companies Act, 1956 (1 of 1956)], as amended from time to time or Chapter X of the Companies Act, 2013 (18 of 2013) or any other law for the time 4. Every loss of revenue as a consequence of an order of the assessing officer cannot be treated as prejudicial to the interest of the revenue. In response to this, the learned DR argued that the meaning of ‘manufacture’ or ‘production’ given by the Hon’ble Supreme Court in the context of sales tax act cannot be imported blindly into the Income Tax Act which is a separate statute. In its order the Tribunal upheld the CIT’s power to invoke revisionary jurisdiction and also upheld CIT’s order with regard assessment of power tariffs with reference to provisional tariff approved by CERC. 6. Because of the vast number and type of assets required to provide service, unit depreciation is not practical, yet accuracy remains important. Essentially, today’s customers should pay for today’s plant, not tomorrow’s or yesterday’s plant. Hence, it could be safely concluded that the assessee is entitled for claiming additional depreciation under section 32(1)(iia) of the Act even prior to the amendment brought in by Finance Act, 2012. The guidance note gives indicators to assess significant components: • Determine the threshold value to The energy so produced in law constituted “goods”. The assessee submits that its activity of generation of power amounted to production of an article or thing. We find that even in the recent decision of the Hon’ble Supreme Court in the case of CIT v. Amitabh Bachchan (2016) 384 ITR 200 (SC) had only concluded that the learned CIT can proceed to adjudicate other issues other than what is mentioned in the original show cause notice. Gross profit is the result of subtracting a company's cost of goods sold from total revenue. It would be pertinent to understand the question raised before the Hon’ble Madras High Court which is reproduced here under :–, “Whether on the facts and in the circumstances of the case the Tribunal was right in holding that generation of power by windmill would amount to manufacture or production of any article or thing?”, It was contended that the Hon’ble Madras High Court was specifically seized of the question as to whether an assessee engaged in the business of generation of power can be said to be engaged in manufacture or production of an article and hence qualified for claiming additional depreciation under section 32(1)(iia) of the Act. Includes a company 3 production lines a, b, c and the following is a list of income per production line statement, Sales -V.C LA 125000 50000 (30000) 20000 75000 (50000) 75000 (25000) 50000 C.M Fixed cost (29500) (1000) (500) (1000) (10000) (2000) (15000) (59000) 16000 Salaries (12500) (7500) (500) (2000) (6000) (500) (9000) (38000) 12000 (8000) (5500) (1000) (3000) (4000) … This appeal by assessee is arising out of revision order of CIT, Kolkata-3, Kolkata vide No. of 2012, date 8-1-2014] had also held that assessee is entitled for additional depreciation under section 32(1)(iia) of the Act for its power plant. Debt bearing 12% Interest is to be repaid in 10 equal annual installments. Then, a well-researched report is prepared to present and defend the selected rates. He focuses on revenue requirement, cost of service and depreciation studies as well as tariff filings, certificate issues and other financial analyses and regulatory…, Are you a benefits recipient or looking for help with your client account? What’s the Right Corporate Structure for Your Organization? In the instant case, the assessee had set up hydel power and thermal power plant, wherein the water and coal gets converted into electricity through the manufacturing process. Besides the said reason; revision order was also passed on other issue of inclusion of additional power tariff. Damodar Valley Corporation Vs. Dy. 24 [Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc. Life of Asset is 15 years. To look forward, we must first look back at the realized utility experience in the continuing property records and use that data. By increasing the return component, a utility can maximize profit. We find that the learned CIT had changed his track from originally stating that the order passed by the learned assessing officer had incorrectly applied the provisions of section 32(1)(iia) of the Act for the assessment year 2011-12, to ‘lack of inquiry’ on the part of the learned assessing officer with regard to the claim of additional depreciation. The ROI was e-field on 28-9-2011 declaring a total income at NIL. In our next article, we will discuss how you can prepare for the best depreciation study possible. The assessment was completed under section 143(3) of the Act on 28-3-2014 determining the total loss at Rs. Six Core Competencies for Next Generation Leaders, Agriculture Tax Credits and Tax Breaks for Farms, Construction Accountants & Business Advisors, Construction Tax Deductions: R&D Tax Credits, Revenue Recognition Implementation for Construction Firms, Assisted Living Accounting and Financial Planning, Independent Practice Financial and Accounting Services, Employee Benefits in the Manufacturing Industry, Cloud Accounting for Veterinary Practices, Multnomah Bar Association Health Insurance, Tax Bracket Management: A Great Way to Boost After-Tax Returns, The Oft-Overlooked Component of Utility Rates: Depreciation, Public utility, regulatory matters and tariff administration. It is clear thus that additional depreciation in respect of business of generation or generation and distribution of power is only applicable with effect from assessment year 2013-14 and subsequent years but not during the assessment year 2011-12. It was contended that in the aforesaid decisions, the asst year involved was prior to assessment year 2013-14. According to Section 32AD, a new deduction of 15% on new plant and machinery in the year of installation and not in the year of purchase. 517 (Kol.) In addition, this exceptional depreciation cannot exceed €15 million per company and per investment project. In the decided case the State Electricity Board generated and distributed electricity energy to various consumers. 2(1)(ii). Assessment was framed by JCIT, Range-9, Kolkata under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for assessment year 2011-12 vide his order dated 28-3-2014. In case of any new machinery or plant which has been acquired and installed by an assessee engaged in the business of generation or generation and distribution of power a further sum equal to 20%, of the actual cost of such machinery or plant shall be allowed as deduction. The Tribunal noted that the power was generated by deploying huge plants and therefore it may be said that there was transformation of one source of energy into another. As a result, depreciation and amortization are not usually included in the calculation of gross profit. 4. Hence, it could be safely concluded that the assessee is entitled for claiming additional depreciation under section 32(1)(iia) of the Act even prior to the amendment brought in by Finance Act, 2012. Moreover, the learned assessing officer had the benefit of the jurisdictional tribunal decision before him in the case of Ankit Metal and Power Ltd. (supra) before him before passing the assessment order for the assessment year 2011-12 under section 143(3) dated 28-3-2014. Accordingly, the assessee submitted before the learned CIT that the learned assessing officer’s order was in conformity with the view expressed in the aforesaid judicial decisions and therefore cannot be considered to be erroneous and prejudicial to the interest of the revenue. For example, when an Income Tax officer adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income tax officer is sustainable in Law.’. Visit our COVID-19 Resource Center to learn about our continued service and additional support for you during this time. In a business venture, the major determinant of whether there will be continuity or discontinuity is cost. It is pertinent to note that the assessee had not been given any opportunity by the learned CIT to address his changed track. The assessee also placed on record before the learned CIT the decision of the Hon’ble Madras High Court in the case of CIT v. VTM Ltd. (2009) 319 ITR 336 (Mad) wherein, the Hon’ble Madras High Court dismissed the revenue’s appeal. The brief facts of this issue is that the assessee is a public sector undertaking engaged in the business of generation and distribution of electricity. Due to the complexity and volume of the calculations, a reliable computer model is imperative for the preparation of most depreciation studies. 6.1. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. This view was again reiterated by the Supreme Court in the case of National Thermal Power Corpn. CST v. M.P. 227,00,22,060 after making dis allowance under section 14A of the Act in the sum of Rs. For assessment year 2005-06 NTPC in its return claimed additional depreciation of Rs. The Tribunal further held that the process of power generation was akin to manufacture or production of an article or thing. Hence it is undisputed that transformation from mere coal to electricity and from mere water to electricity happens pursuant to the manufacturing process and the electricity so produced or generated becomes a separate marketable commodity. Accordingly, However, the high court, by applying rule of "EJUSDEM GENERIS" held that electric generator by itself generate electricity, and therefore, do not fall into category of renewal energy devices. 2. Assumed that you purchase a scissor of 100 yen. This claim for depreciation is generally referred to as capital allowances. The focus of this article is on the plant content within buildings in particular. State of AP v. National Thermal Power Corpn. In view of the above discussion, I am of the opinion that the assessment order made under section 143(3) dated 28-3-2014 for the assessment year 2011-12 is erroneous in so far as it prejudicial to the interest of Revenue. You are therefore given an opportunity to make your submission personally or through your duly Authorized representative on 13-8-2015 at 11:30 A.M. before me at my chamber. an electric transformer), a reasonable projection of the overall remaining life of the asset account can be determined. Total additional depreciation under section 32(1)(ii) was found to have been claimed to the tune of Rs. CIT (ITAT Kolkata). to produce energy/electricity. 6,37,45,348 which, in his opinion, could be granted only with effect from assessment year 2013-14 as the assessee was engaged in the business of generation and distribution of electricity pursuant to the amendment brought in by the Finance Act, 2012 in section 32(1)(iia) of the Act. The various apex court decisions relied upon by the assessee before the learned CIT as mentioned supra in the context of levy of sales tax on the sale of electricity had also decided that the generation of electricity amounts to production of article or thing. Shared Services Company Benefits Oregon Telcos. Damodar Valley Corporation passed under section 143(3) dated 28-3-2014 for the assessment year 2011-12. Now the question to be decided is as to whether the assessee engaged in generation and distribution of electricity could be said to be engaged in the business of manufacture or production of any article or thing so as to be eligible for claiming additional depreciation under section 32(1)(iia) of the Act. In the assessment order for assessment year 2005-06 the assessing officer allowed the additional depreciation. 13–6 Company policy should provide for a plant ledger, identification tags on all plant assets, and a system of retirement work orders. Send us an email at info@aldrichadvisors.com. Hence passing an assessment order by following the various judicial decisions would not in any manner make the assessment order erroneous. 4.3. For that on the facts and in the circumstances of the case, various judicial forums like High Court & ITAT having held that assessees engaged in generation of power were eligible for additional depreciation under section 32(1)(iia) and these decisions being available in public domain prior to passing of the order under section 143(3) for assessment year 2011-12; the CIT was grossly unjustified in holding the assessment order under section 143(3) to be erroneous on the ground that additional depreciation was allowed by the assessing officer. 517 (Kol.) 72A. Amount of depreciation so made shall be invested only in the electricity supply company or, in other cases; approval of the State Government must be taken. 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Learn about our continued service and additional support for you during this time was prior to year! The investment through depreciation will greatly impact ratepayers and the utility ’ s under. Cit v. Hutti Gold Mines Co. Ltd. ( 2002 ) 127 STC 280 ( )! Hence passing an assessment order under section 143 ( 3 ) dated 28-3-2014 for the sake of,. Further opportunity. ” power Corpn is prepared to present and defend the selected rates 77 ( Pune ) Trib! Submissions and perused the materials available on record solar depreciation: the “ maximum! Covid-19 Resource Center to learn about our continued service and additional support for you this... It was contended that in the case would be decided ex-parte without any/ further opportunity. ” it or provide updated. Your utility claim for depreciation is not practical, yet utility executives wonks. 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