2017 (5) TMI 1052 - HC - Income Tax

Disallowance of depreciation - assessee claimed 15% depreciation on the electrical installations used for manufacturing activity - ITAT allowed claim - Held that - This Court is of the opinion that the ITAT s findings are sound. As noticed by CIT(A), steel and power ingots manufacturing is power- intensive, necessitating continuous power generation. For this purpose, the assessee had installed certain electrical sub-stations, towers etc. and other supporting equipment. These were an integral and critical part of its manufacturing process and cannot be compared with electrical fittings which have been defined in Note 5 to Appendix 1(E) & (G) which talks of electrical fittings as including electrical wiring, switches, sockets, other fittings and fans etc. A clear demarcation, therefore, is essential; wherever electricity generation or continuous power supply is essential for the basic industrial activity of an assessee or unit, the heavy equipments so used cannot fall within the rubric of fitting such as fans, switches etc. as to disqualify for depreciation - Decided against revenue

Summary

Issues:
1. Disallowance of depreciation claimed by the assessee.
2. Interpretation of the term "plant" for the purpose of depreciation.
3. Whether electrical installations used for manufacturing activity qualify for depreciation.

Analysis:
1. The primary issue in this case revolves around the disallowance of depreciation amounting to ?31,14,97,013 claimed by the assessee. The Assessing Officer (AO) contended that the articles for which depreciation was claimed were part of furniture and fittings, not eligible for depreciation under Section 43(3). However, the CIT(A) and ITAT both ruled in favor of the assessee, stating that the electrical installations were integral to the manufacturing process, specifically in iron and steel manufacturing, making them eligible for depreciation at the rate applicable to plant and machinery.

2. The interpretation of the term "plant" played a crucial role in determining the eligibility of depreciation for the electrical installations. The Revenue argued that electrical appliances and articles cannot be considered as plant based on the definition excluding buildings and furniture or fittings. However, the ITAT, supported by the CIT(A), emphasized that in industries like steel manufacturing, where continuous power generation is essential, the electrical installations are an indispensable part of the plant and machinery used for manufacturing activities.

3. The final issue addressed was whether the electrical installations used for manufacturing activity qualified for depreciation. The ITAT, relying on various precedents, upheld the CIT(A)'s decision to allow depreciation on the electrical installations at the rate applicable to plant and machinery. The court agreed with this assessment, highlighting the critical role of electrical sub-stations and other supporting equipment in the manufacturing process, distinguishing them from mere electrical fittings like fans and switches as per the Income Tax Rules.

In conclusion, the High Court dismissed the appeal, affirming the decision to allow depreciation on the electrical installations used for manufacturing activities. The judgment emphasized the importance of considering the specific industrial requirements and the integral nature of the equipment in determining eligibility for depreciation, ultimately supporting the assessee's claim in this case.