2022 (3) TMI 459 - AT - Income Tax

Disallowance of depreciation on electric installation - whether the items of electrical installation listed are eligible as plant and machinery? - HELD THAT - Onus is on the assessee to explain whether each item perform the function of manufacturing. On perusal of the list of the items, we find that items include transformer, panel switchgear, cable, electric Control Panel etc. Item at serial No. 25, 26, 30, 31, 32 and 33 of the list for assessment year 2007-08 has been mentioned as supply of electrical items . There is no detail of such items available on record. Item at serial No. 34 is transformer oil and item at 36, 37 and 44 is diesel for DG set. The assessee has not explained how these items are qualified as capital expenditure. Further, item at serial No. 40 to 43 is rent for DG set. No specific explanation for qualifying the same as capital expenditure, has not been provided by the assessee. Similarly, in the list for assessment year 2008-09 items are mainly transformer, electrical capacitor panel, DG set, split AC, pumphouse panel, window AC etc and the assessee has not provided function performed by these items in the process of manufacturing. No details of their place or location of installation has been provided before us. No doubt, if any split AC is integral part of machinery itself, the assessee may be entitled for depreciation at the rate of the plant and machinery, however, if a split AC is provided in the chamber of a person in the factory as ancillary item, same will not be entitled for rate of depreciation applicable in the case of plant and machinery. Assessee has not complied the direction of the Hon ble High Court and not furnished function performed by each item separately. Further, no such information is available on record. Though the appeal is very old, but in the facts and circumstances and in the interest of the substantial justice, we feel it appropriate to restore this issue to the file of the Assessing Officer for deciding in the light of the direction of the Hon ble Delhi High Court with the direction to the assessee to provide functions performed by each and every item of the list provided in para 4 and para 5 of the Hon ble High Court and then the AO shall decide the issue in accordance with law. Accordingly, the grounds of disallowance of depreciation on electric installation in both the assessment years are allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of depreciation on electric installation.
2. Determination of whether items under "electric installation" are entitled to depreciation at 10% under "electrical fitting" or 15% under "plant and machinery".

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Electric Installation:

The Tribunal initially dismissed the assessee's claim for higher depreciation on electric installations, considering them not integral to plant and machinery. The Tribunal observed that the majority of expenses, such as transformer, panel switchgear, LT PVC Cable, Poly Cab Cable, electric generating set, Electrical Control Panel, Electrical Items, installation work, DG Set, etc., were part of electrical fittings, which are eligible for only 10% depreciation. The Tribunal referenced case laws like CIT vs. MTNL and Siemens Ltd., noting the different business nature and facts, concluding that the items could not be treated as part of plant and machinery.

2. Determination of Depreciation Rate:

The Hon’ble High Court of Delhi remitted the issue back to the Tribunal to examine whether items listed under "electric installation" should be depreciated at 10% as electrical fittings or at 15% as plant and machinery. The High Court emphasized the need for greater consideration, directing the Tribunal to examine each item separately and determine the appropriate category.

Tribunal's Further Proceedings:

Upon remand, the Tribunal heard the parties through videoconferencing. The assessee argued that the items were integral to the manufacturing process and thus should be considered part of plant and machinery, eligible for 15% depreciation. They cited various judgments, including CIT v. Karnataka Power Corporation and CIT vs. Delhi Airport Services, to support their claim that the items in question were essential for manufacturing operations.

The Department contended that the items were ancillary and not integral to the manufacturing process, thus only qualifying for 10% depreciation. They referenced the decision in CIT Vs. JKK Textiles Processing, arguing that transformers and DG sets were for electricity supply and not directly involved in manufacturing.

Tribunal's Findings:

The Tribunal noted that the definition of "plant" includes items essential for business operations. However, it emphasized the need for a functional test to determine if each item is integral to manufacturing. The Tribunal observed that the assessee had not provided sufficient details about the function and installation location of each item. Items like transformer oil, diesel for DG sets, and rent for DG sets lacked explanation on their qualification as capital expenditure.

Conclusion:

The Tribunal restored the issue to the Assessing Officer (AO) for a detailed examination, directing the assessee to provide specific functions performed by each item listed by the High Court. The AO is to decide the issue in accordance with the law, considering the functions and roles of each item in the manufacturing process.

Final Order:

Both appeals were allowed for statistical purposes, with the direction to reassess the depreciation claims based on detailed functional analysis as per the High Court's instructions. The order was pronounced on 23rd September 2021.