RATE OF DEPRECIATION ON ELECTRIC GENERATORS- different ruling due to different contentions raised before Rajasthan and Gujarat high Courts.

[DEV KUMAR KOTHARI]

I Conventional. Electric Generators:

Generally electric generators used to generate electricity by using conventional fuels such as coal, diesel, petrol, gas, firewood, etc are considered as falling within the general category of plant and machinery and depreciation applicable at general rate is claimed and allowed.

For generators, which use non-conventional fuels, municipal waste and agricultural waste or generators which harnesses solar power and wind power to generates electricity is treated as eligible for higher depreciation under special catagories. Earlier, for renewable energy devices higher rate was @ 30%, it was raised to 100% and now it has been reduced to 80% w.e.f. 01.04.03.

Honorable Rajasthan High Court  has HELD  that higher depreciation will be allowable on electric generator even if it does not run on wind energy - CIT V Agarwal Transformers P. Ltd. 2002 -TMI - 12300 - (RAJASTHAN High Court). The High court held that the condition of running on wind was not attached to generator but only to pumps. The judgment has been followed in CIT V Abressive India, (2003) 133 Taxman 389 (Raj).

It appears that the above judgments of Rajasthan High Court have been accepted by the revenue, as there is no news about SLP filed.

In CIT Vs. Anang Polyfil Pvt. Ltd. 2004 -TMI - 11176 - (GUJARAT High Court) it was held that diesel generator are not entitled to higher depreciation. However the judgment was rendered  without consideration of the ratio laid down by Rajasthan High Court or on consideration of rule of interpretation as used and applied by Rajasthan High Court in Agarwal Transformers P. Ltd.

II.The relevant entries in Appendix to I.T. Rules: 

Old Appendix (up to A.Y. 1987-88):

III. Machinery and plant:

(ii) Special rates

D.(10A) Renewable energy devices, being--

(i) Flat plate solar collectors;

(ii) Concentrating and pipe type solar collectors;

(iii) Solar cookers;

(iv) Solar water heaters and systems;

(v) Air/gas/fluid heating systems;

(vi) Solar crop driers and systems;

(vii) Solar Refrigeration, cold storages air conditioning systems;

(viii) Solar steels and desalination systems;

(ix) Solar power generating systems;

(x) Solar pumps based on solar thermal and solar photovoltaic conversion;

(xi) Solar photovoltaic modules and panels for water pumping and other applications;

(xii) Wind mills and any specially designed devices which run on wind mills

(xiii) Any special devices including electric electric generators

 and pumps running on wind energy . . . . ..    30%   

(xiv) Biogas plants and biogas engines;

(xv)  Electrically operated vehicles including battery powered or fuel-cell powered vehicles;

(xvi) Agricultural and municipal waste conversion devices producing energy;

(xvii) Equipment for utilizing ocean waves and thermal energy;

(xviii) Machinery and plant used on the manufacture of any of the above such items"

New Appendix ( from A.Y. 1988-89 to A.Y.2002-03) :

 (Only entry relating to generator is reproduced)

III. Machinery and Plant

3(iii).Energy saving devices, being --

G. Other equipments:

(xiii) Renewal energy devices being--

(m) Any special devices including electric generators and pumps running on wind energy  100%

Latest Appendix w.e.f.. 01.04.2003 - see { (2002) 124 Taxman 39 }:

(Only entry relating to generator is reproduced)

III. Machinery and plant.

(3)

(8)

(ix) Energy saving devices, being--

(m) Any special devices including electric generators and pumps running on wind energy     80%   

A reading of the above entries shows that all along special rate has been prescribed, and it is under the category of  renewal power  saving  special devices.. The word any special device has been used for including various equipment like electrical generator and pumps running on wind energy. That it appears that this entry may be treated as an inclusive entry in which first condition is that the item should be a machinery and plant secondly it should be energy saving device thirdly it should be a special device fourthly it may be an electric generator or pumps running on wind energy.

RUNNING ON WIND ENERGY - WHETHER A CONDITION:

It appears that the requirement of running on wind energy is attached only in relation to pumps and not in relation to electric generators.  This is because electrical generator and pumps are two different types of equipments. If an electrical generator is an energy saving device and is also a special device it may be eligible for higher depreciation irrespective of the fuel or other form of power being used to run the generator. Thus a diesel generating set or petrol generating set or coal based generating set may also be eligible for higher depreciation, if it is a special device and is a renewal energy saving device. The judgment of the Rajasthan High Court supports this view.

General understanding about the entry:

It appears that generally general electric generators are not treated as renewal energy devices. Furthermore, general perception about the above entry is that electric generator should be run on wind energy to be eligible for higher depreciation.

Cases before Gujarat High Court:

A. In CIT Vs. Anang Polyfil Pvt. Ltd. 2004 -TMI - 11176 - (GUJARAT High Court). The Hon'ble High Court considered various entries and particularly the item relating to electric generators the court considered that a bare perusal of the aforesaid item clearly indicates that the higher rate of 30% depreciation is allowed on renewable energy devices as specified in the sub items of item No.10A. Sub-item (i) to (xi) refer to equipments for generating solar energy, sub-item (xii) and (xiii) refers to wind energy. Sub-item (xiv ) refers to biogas energy. Sub item (xv) refers to electrically operated vehicles which do not consume conventional fuel like petrol or diesel. Sub tem (xvi) also refer to energy produced by conversion of agricultural for municipal wastes. Sub-item (xvii) refers to energy generated by utilizing ocean waves and sub-item (xviii) refers to machinery and plants used for manufacture of the above sub-items. Accordingly, all the sub-items only refer to renewable energy devices i.e. devices for generating non conventional energy.

In relation to sub-item (xiii) court noted that it would need some explanations on reading of this item at first blush it may appear that this sub-item includes electric generators and, therefore, diesel sets for generating electrical energy may fall under this item. However, court held that on proper scrutiny it would appear that what is contemplated is electric generators running on wind energy and pumps running on wind energy. Therefore the High Court held that generators running on diesel would not fall under the above item.

Therefore in view of Gujarat High Court, the condition of running on wind is attached to generators also.

In case of CIT -vs- Transpek Industries Ltd 2003 -TMI - 11467 - (GUJARAT High Court) the Assessing Officer allowed 10% depreciation as against the assessee's claim @ 15%. In this case the Tribunal categorically recorded that such machinery namely, diesel generating set, was entitled to depreciation @ 30% as held by the Tribunal in some other cases.

However, the assessee was allowed depreciation @ 15% in earlier years as well as subsequent years.  Therefore, the Tribunal allowed depreciation @ 15%. In view of these facts the High Court held that the Tribunal was justified in allowing depreciation @ 15%. Observations of the Tribunal and the high court in this case were not considered by the court in the case of Alang Polyfill (Supra.)

Case before the Rajasthan High Court:

In the case of Agarwal Transformers P.Ltd the Tribunal allowed higher depreciation @ 30% on the reasoning that generator is a renewable energy device. 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.

However, honorable high court allowed higher depreciation by applying principles of  interpratation - "NOSCITOR A SOCIIS"  and held that `electric generator' is different from `pump  run on wind energy, which falls within the renewable energy devices. The court also held that it is erroneous to say that the condition 'run on wind energy' is also attached to electric generators. Even grammatically neither, nor the word 'both' is used after the word 'pump' in the relevant entry and this also clarifies that the condition 'running on wind energy' is only attached to the word 'pumps' and not to electric generators.

The court also considered that on further reading of the entry it is found that it is inclusive, it refers to two different items namely, electric generators and secondly pumps run on wind energy. Therefore, the court held that electric generator clearly falls under the category of renewal energy devices and the Tribunal has rightly allowed the depreciation @ 30% on basis of item 10A, clause (xiii) of Appendix I.

A BENEFICIAL INTERPRATION:

The Rajasthan high court has indeed taken a very liberal  approach and beneficial interpratation has been rendered. This is likely to promote industry of electric generators and also promote people to have own electric generators.

Doubts and controversies:

However, doubts that arise are that  (a) as per heading of entry no. (xiii) or subsequently re numbered entries the item falling in to this category must be a `renewal energy device',  the  Rajasthan High court has noted that electric generator is not a renewal energy device but still it falls into that category as per the entry. Therefore, the Revenue may take the view that the primary condition of being a renewable energy device has  not been  satisfied and the purpose of  higher depreciation was to promote electricity  generation by using wind energy is not served . However, in this case the difference was meager 30%  allowed by the high court as against 20%  allowed by the A.O. and amount may not also be significant Therefore, it is likely that the Revenue may not appeal against  the judgement of the  Rajasthan high court thus it may  attain finality.

The differences between views of courts are also now coming to light. However, when two views are possible, the view beneficial to the assessee should be adopted.

There should not be serious dispute for rate of depreciation:

Generally depreciation is to be allowed over a period of two or more assessment years. Even in case of items eligible for 100% depreciation many times depreciation is spread over two years because in the first year assets is used for less than 180 days. Depreciation at higher rate is allowed with specific purpose in mind. Therefore, when over a period of time entire cost is intended to be allowed, then there is no purpose served merely by extending the period over which allowance is to be allowed. Considering liberal approach adopted for depreciation allowance, the revenue should not indulge in litigation.

Litigation may be harmful to the revenue:

In cases like the case of generator when most of assesses claim normal depreciation, litigation by revenue in few cases can be harmful to the revenue. Besides costs involved in litigation, the litigation can be detrimental to the revenue for other reasons also. When a beneficial judgment is published, the other assesses who did not claim similar relief are also made aware and they also start claiming additional relief based on liberal approach shown by courts in allowing relief. If a relief is allowed and it does not get publicity, few assesses will claim such relief. However, when the matter comes to public knowledge, more and more assesses would start claiming such relief. Keeping this in mind, it is advisable for the revenue not to indulge in litigation where, generally assesses are not claming such relief.  

 More care in drafting is required:

Considering the different views taken by two high courts on the issue and possibility of higher depreciation being allowed by applying the rule of interpretation, it appears that the matter will involve more controversies and other courts may take different views. Therefore finality will be only after the judgment of the Supreme Court. It would be better to be more careful in future while drafting of the provisions of the Income Tax Act and Rules so as to avoid this type of controversies.