HIGHER DEPRECIATION ON POWER SAVING DEVICES -PURPOSIVE AND LIBERAL INTERPRETATION IS REQUIRED.

[DEV KUMAR KOTHARI]

SUMMARY:

Power saving and renewal power devices are used to conserve power and fuel. Considering the social and economic benefit of these equipments and other relevant factors like high capital cost of such equipments, and saving made on account of power and fuel resulting in to higher profitability higher depreciation is allowed on such equipments. The broad nature is power saving equipments and renewal power devices. Descriptive entries under the broader headings can be considered as illustrative list as because lot of research and development is going on for development of new equipments. Therefore, a purposive and liberal approach s required while interpreting these entries.

ENCOURAGEMENT OF CAPITAL INVESTMENT:

To encourage capital investments by equipment manufacturers in manufacture of renewal power devices and investment by other assessees in renewal power devices and power saving equipments etc. higher depreciation scheme were formulated to achieve saving of power and fuels. Higher depreciation is allowable for:

A.Use of various equipments falling under item no. III (8) (ix) And (xiii) of  The Appendix to the Income -tax Rules, 1962 (Rules). And

B. To encourage manufacturing of equipments under the head Renewal energy devices as per entry no.III (8) (xiii) Vide sub-entry) (r) which reads As follows:

(r) Machinery and plant used in the manufacture of any of the above sub-items.

An analysis would show that manufacturers of only renewal power devices are entitled to higher depreciation and not other power saving devices manufacturers. Whereas equipments for power saving and renewal power devices both are entitled to higher depreciation if used in any business or profession.

2. LIBERAL APPROACH IS REQUIRED:

As the higher rate of depreciation is allowed to encourage certain socio-economic purpose, a liberal approach is required to interpret various categories of plant and machinery, which are eligible for higher rate of depreciation.

The main socio-economic purposes to be achieved are:

(a) To save natural resources of power as they are limited,

(b) To reduce import of petroleum and coke products,

(c) To reduce foreign exchange outgo on import of fuels.

(d) To improve capital base of industry by use of better equipments requiring higher capital expenditure.

(e) To improve profitability of industry by saving power cost

(f)   To reduce pollution, as because power saving devices run more efficiently and less smoke is generated.etc.

RELEVANT ENTRIES IN APPENDIX*:

As per latest Appendix I with effect from A.Y. 2003-04, item No.

8. (ix) Energy saving devices, being -

A. Specialized boilers and furnaces:

(a)  Ignifluid / fluidized bed boilers

(b) Flameless furnaces and continuous pusher type furnaces

(c) Fluidized bed type heat treatment furnaces

(d) High efficiency boilers (thermal efficiency higher than 75 per cent in case of coal fired and 80 per cent in case of oil/gas fired boilers).

Similarly in entry No.3 (iii)

A. Specialized boilers and furnaces:

(a) Ignifluid/ fluidized bed boilers

(b)  Flameless furnaces and continuous pusher type furnaces

(c) Fluidized bed type heat treatment furnaces

(d) High efficiency boilers (thermal efficiency higher than 75 per cent in case of coal fired and 80 per cent in case of oil/gas boilers)

Fluidized bed drier is falling under category (c) of the entry. The term furnace is used as an example. It appears that while disallowing higher depreciation the Revenue Authorities are only considering boilers and furnaces and ignoring the function of heat treatment. There is heat treatment of the tea though there may not be visible flame but still heat treatment is provided and therefore it is eligible for higher depreciation.

* In the new appendix also the entries are on similar lines though the rate varies from time to time between 80- 100%

4. DESCRIPTIVE ENTRIES ARE ILLUSTRATIVE:

Various descriptive entries in the appendix can be considered as illustrative and not exhaustive. This approach is also required because due to research and development new equipments are being developed. Therefore, the broad headings of relevant entries may be considered in a broader manner instead of restrictive manner. The broad entries read as follows:

"Energy saving devices, being - " and "Renewal energy devices being-" , thus if an item of plant and machinery is energy saving device or renewal energy device, it may prima-facie be considered as eligible for higher depreciation. 

5. APPROACH OF ASSESSING OFFICERS:

Unfortunately the departmental authorities in many cases are not adopting liberal approach. Attempt is made to find out some technical differentiation in specifications or description and nomenclature of equipment Vis a Vis entry in the Appendix to deny the benefit of high depreciation to the assessee. While doing so the Assessing Officers ignore the fact that the assessee has made investment in power saving devices or renewal power devices, they saved on account of cost of power and fuel and thus generated higher income.  Therefore, in fact over a period of time the assessee is able to generate more taxable income. The only benefit, which the assessee gets, is an accelerated depreciation allowed over a period of time whereas the assessee starts saving on account of power immediately. Such equipments are also preferred only by those manufacturers who have substantial power cost as a proportion of total cost of manufacturing goods, because otherwise the high capital cost will not be compensated by saving made on account of power and fuels.

Thus, over a period of   2- 3 years the revenue will  gains due to lower cost of power resulting into higher profitability of the assessee and higher tax payment. The savings so made will offset the revenue loss due to  higher depreciation allowed in  initial years.

6. TRIBUNALS ORDERS ARE NOT FOLLOWED:

It is further unfortunate to observe that many A.O.'s  are not allowing higher depreciation  even when the order of ITAT has attained finality and  allowed higher depreciation on Fluidized Bed Driers (FBD) to Tea and other Industries, which use such equipment and as a result power is being saved considerably resulting in to higher taxable income over aperiod of time. The Honorable Tribunal in the case of Warren Tea Ltd. for AY 1985-86 vide order dated 7^th May, 1993 in ITA No.193/Cal, of 1990 (C. Bench) discussed various aspects of FBD, the aspect of power saving, and nature of equipment vis a vis the purpose of incentive by way of higher depreciation and the tribunal found that the FBD was a power saving device used to dry tea, it saved power and fuel and thus allowed higher depreciation on FBD use in Tea estates.

The order of Tribunal seems to have been accepted by the revenue and has gained finality because the department seems to have not challenged the order of the Tribunal and the ITAT and CIT (A) are following the order of the Tribunal. However, many times the department is again preferring appeal against CIT (A)'s and ITAT's orders on the issue.

7. THE DIFFERENTIATION MADE BY A.O.:

The officers of Income Tax Department are making a technical difference between the description of equipment described in the Appendix to the Rule and description of FBD. As per some Assessing Officers the entry under this rule will not cover fluid bed drier because it is not a boiler or heat treatment furnace. However, while doing so they are ignoring the functions of FBD. It is also a heat treatment furnace for drying of tea though the treatment is not by direct flames, but by way of heating. Thus the effect is extracting the moister by creating hot environment within the body of the drier where the crushed tealeaves are kept for the purpose of drying  the same i.e. wet goods placed in the FBD for drying.

8. TRIBUNALS ORDERS SEEMS TO HAVE ATTAINED FINALITY:

There are many orders of the Tribunal allowing higher depreciation on fluidized bed dryers. For example in ACIT Vs. Bijoy Nagar Tea Company Limited (2002) 253 ITR 71 (AT) (Cal.Trib.), a similar matter came before the Tribunal. The Tribunal followed the decision in the case of Warren Tea Limited (Supra.) and observed as follows:

That the table of depreciation mentioned only a boiler and not a drier, yet the specific nature of the drier and the boiler being fluidized bed type is the same in both the cases. As boiler and drier may serve two different functions but the principle of conservation of energy in both the fluidized bed type heat boiler and the fluidized type heat drier is the same. Depreciation @ 100% was provided on these type of plants on the consideration that they consume much less energy than the normal ones. Therefore, Tribunal held that depreciation @ 100% was allowable on these types of plants as they consume much less energy than the normal dryers.

From a reading of the order it appears that the departmental representative has not stated that any appeal is pending against the order in Warren Tea Ltd. In some cases represented by the author also before the ITAT, Kolkata, the departmental representative has not stated that the department's appeal is pending before the high court. In all cases argued by the author on similar issue the Tribunal allowed higher depreciation. In many of such cases department has not filed appeal before the High court. Therefore, in view of old matter of order DT. 07.05.1993 (fifteen  years having lapsed) in case of Warren Tea Ltd. it can be reasonably assumed that any appeal is not pending in the case of Warren Tea Ltd. It was also learned from the Counsel of Warren Tea that as per his information the department has not appealed against the order.

9. ACCEPTED ORDER OF TRIBUNAL  SHOULD  BE FOLLOWED:

Now it is well settled that when the Revenue, acting under a Central Enactment has not preferred an appeal against the order of Tribunal then the decision of the Tribunal should be followed all over India, unless there are very good reason constituting, a  'just cause' to seek intervention of High Court or the Supreme Court for further carrying the matter in appeal in some other case.  In this regard one may fruitfully rely on Berger Paints India Ltd V CIT  (2004) 266 ITR 99 (SC)= [2008 -TMI - 6139 - SUPREME Court] and other judgments reported at 249 ITR 219 (SC), 254 ITR 606 (SC), and 257 ITR 59 (SC) referred to in the case of Berger Paints.

In case of power saving devices, the revenue cannot take plea that earlier appeal was not filed because revenue impact was less than prescribed limit. Because the equipments are costly and the extra depreciation allowed by taking higher rate will involve substantial amount.

10. PROVISION FOR RECTIFICATION MAY REDUCE LITIGATION:

If specific provision be made in the Income-tax Act, to provide for following orders of higher authorities/ courts and also for rectification of the order in case the order earlier followed is reversed by further higher authority or court, litigation can be reduced considerably.