2014 (12) TMI 1310 - AT - Income Tax

Disallowance of depreciation on certain equipment forming part of cogeneration system - Held that - As we consider the contention of the assessee that the higher efficiency boiler and 12.65 KVA turbine have to be considered together along with other equipments necessary for generation of power, as the integrated cogeneration system. In our view, there cannot be two opinions that high efficiency boiler along with turbine and the associated equipments connecting them, increasing its efficiency etc., are to be considered as part of cogeneration system and are therefore eligible for higher depreciation allowance. CIT(A) observed that RCC Chimney and Bagasse Drier are part of the higher efficiency boiler. This factual finding is not disputed before us by the revenue. Thus, both these items have to be considered as integral part of the cogeneration system. The very expression cogeneration refers to simultaneous generation of two forms of power i.e. heat and electricity. Boiler is one component of such system wherefrom the root power i.e. steam is generated and it is this steam that is converted into electricity power with the use of a turbine. Thus, the boiler has a dual utility i.e. as standalone item and also a part of cogeneration system. High efficiency boilers are required for generation of power. Therefore, RCC Chimney and Bagasse drier forming part of boiler system are eligible for higher depreciation. Coming to DC Drier which are energy saving devices, we are of the view that this cannot be used independently in a cogeneration system. These are energy saving device and are eligible even on standalone basis for higher rate of depreciation. They fell within one of the specific category in energy saving device. Hence, higher rate of depreciation should be allowed on this equipment also. Steam Piping is part of the boiler. We do not appreciate the findings of the revenue authorities that steam piping cannot be considered as part of cogeneration system. Even applying the test laid down by various courts, we have to necessarily hold that steam piping cannot be used independently or standalone basis. It is an integral part of cogeneration system, hence, eligible for higher depreciation. Coming to the coal & gas feeding system and coal handling system, we apply the decision of Hon ble M.P. High Court in the case of Vippy Solvex Products Ltd (2007 (3) TMI 746 - MADHYA PRADESH HIGH COURT) and come to our conclusion that this is an integral part of high efficiency boiler. The very description of nature of the equipment demonstrates that it cannot be independently used and has to be used along with the boiler. Thus, we direct the AO to treat the coal & gas feeding system and coal handling system as integrated part of cogeneration system and allow higher depreciation on the same. With regard expenditure on Sub-station power line, we cannot agree with the contention of the appellant that expenditure incurred on sub-station power line is also part of the cogeneration system. This expenditure is necessary for onward distribution of the power generated in a cogeneration system and hence cannot be considered as an integral part of the cogeneration system. We now consider the additional ground raised by the assessee on the issue of expenditure incurred on sub-station power line, which was ultimately handed over to APTRANSCO. Both the parties agreed that this is legal claim and that the facts are on record. Under these circumstances, we hold that the ld CIT(A) should have admitted this additional ground of the assessee and adjudicated the same following the decision of Hon ble Supreme Court in the case of NTPC Ltd., (1996 (12) TMI 7 - SUPREME Court). We direct the AO to treat the expenditure incurred by the assessee on construction of sub-station power lines as incurred in the revenue field and allow the claim of the assessee. Needless to say that since the entire expenditure incurred by the assessee is allowed as revenue expenditure the question of allowance of depreciation does not arise. Claim of the assessee that the expenditure incurred for sanction of HT power line is in the revenue field. The amount is paid as non-refundable amount to obtain approval of power distribution company ltd., for extension of power supply. No asset has been created and hence, the question of treating the expenditure as capital in nature does not arise. Consistent with the view taken by us in the case of Substation power line, which was handed over to APTRANSCO, we direct the AO to allow this expenditure as in the revenue field.

Summary

Issues Involved:
1. Disallowance of interest payable on purchase tax.
2. Disallowance of contribution to Mayura Kalaparishat.
3. Disallowance of depreciation on certain equipment forming part of cogeneration system.
4. Treatment of expenditure incurred on sub-station power line.
5. Treatment of expenditure for sanction of HT power line.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Payable on Purchase Tax:
The appellant contended that the Commissioner of Income Tax (Appeals) erred in upholding the Assessing Officer's disallowance of interest payable on purchase tax amounting to Rs. 9,51,160. The appellant argued that the provisions of section 43B were not considered in the judgments relied upon by the authorities. However, this ground was not pressed by the appellant, acknowledging the prevailing legal position against them.

2. Disallowance of Contribution to Mayura Kalaparishat:
The appellant challenged the disallowance of Rs. 5,000 contributed to Mayura Kalaparishat as part of corporate social responsibility. This ground was also not pressed by the appellant due to the small amount involved, reserving the right to raise similar claims in the future.

3. Disallowance of Depreciation on Certain Equipment Forming Part of Cogeneration System:
The main issue revolved around whether specific equipment forms part of the cogeneration system eligible for higher depreciation. The appellant argued that items like RCC Chimney, Bagasse Drier, DC Drier, Steam Piping, Coal & Gas Feeding System, Coal Handling System, and Sub-station Tower Line should be considered integral parts of the cogeneration system.

- RCC Chimney and Bagasse Drier: The Tribunal held that these items are integral parts of the cogeneration system, as they form part of the high-efficiency boiler.
- DC Drier: Recognized as an energy-saving device eligible for higher depreciation even on a standalone basis.
- Steam Piping: Considered an integral part of the cogeneration system, as it cannot function independently.
- Coal & Gas Feeding System and Coal Handling System: Following the decision of the Hon'ble M.P. High Court in Vippy Solvex Products Ltd., these were deemed integral parts of the high-efficiency boiler and thus eligible for higher depreciation.
- Sub-station Tower Line: Not considered part of the cogeneration system as it is necessary for power distribution rather than generation.

4. Treatment of Expenditure Incurred on Sub-station Power Line:
The appellant claimed that the expenditure on sub-station power lines handed over to APTRANSCO should be treated as revenue expenditure. The Tribunal agreed, citing the Hon'ble Supreme Court's decision in NTPC Ltd., and the Hon'ble Rajasthan High Court's ruling in Hindustan Zinc Ltd., directing the AO to treat the expenditure as revenue expenditure.

5. Treatment of Expenditure for Sanction of HT Power Line:
The appellant argued that the payment made for sanction of HT power line should be treated as revenue expenditure. The Tribunal concurred, noting that the expenditure was necessary for obtaining approval from the power distribution company and did not result in the creation of an asset, thus directing the AO to allow it as revenue expenditure.

Conclusion:
The Tribunal partly allowed the appeal, granting higher depreciation for certain equipment forming part of the cogeneration system and treating the expenditure on sub-station power lines and HT power line sanction as revenue expenditure. Grounds not pressed by the appellant were dismissed with the provision to raise them in the future.