2022 (9) TMI 1662 - AT - Income Tax

Disallowing investment allowance u/s 32AC - claim not allowable to business of generation transmission or distribution of power - HELD THAT - We note that it is now well settled proposition that generation of electricity amounts to manufacture or production of any article or they qualifying for deduction u/s 32AC. The case laws of Tribunal in Giriraj Enterprises 2017 (3) TMI 189 - ITAT PUNE and Hon ble High Courts Atlas Export Enterprises 2015 (3) TMI 846 - MADRAS HIGH COURT duly supports this proposition. No contrary decision from Hon ble jurisdictional High Court was cited before us. Hence we uphold the well reasoned order of Ld. CIT(A). Appeal by the Revenue is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

(i) Whether the CIT(A) erred in deleting the addition made by the Assessing Officer by disallowing the investment allowance under section 32AC of the Income Tax Act, 1961, on the basis that the allowance is available only to assessees engaged in the business of manufacture or production of an article or thing, and not to those in the business of generation, transmission, or distribution of power.

(ii) Whether the CIT(A) erred in considering similar issues in the instant case and the cases on which it relied, without recognizing that the referred cases pertain to claims of additional depreciation under section 32(1)(iia), while the instant case relates to a claim of investment allowance under section 32AC.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents

The legal framework revolves around section 32AC of the Income Tax Act, which allows a deduction for companies engaged in the manufacture or production of any article or thing, provided they acquire and install new assets exceeding a specified cost. The Assessing Officer relied on the definition of "manufacture" in section 2(29BA) and the ITAT, Pune's ruling in Giriraj Enterprises vs. DCIT, which interpreted similar language in section 32(1)(iia) to exclude power generation from "manufacture or production of any article or thing."

Court's interpretation and reasoning

The Court upheld the CIT(A)'s decision, which favored the assessee based on the majority view in the ITAT, Pune ruling and other precedents. The CIT(A) considered that the generation of electricity amounts to the production of an article or thing, thus qualifying for the investment allowance under section 32AC. The principle that when two interpretations are possible, the one favorable to the assessee should be adopted, was pivotal in this reasoning.

Key evidence and findings

The CIT(A) relied on multiple judgments from various tribunals and courts, including the ITAT, Indore, and the Hon'ble Madras High Court, which supported the view that electricity generation is akin to manufacturing. The CIT(A) emphasized that the amendment brought by the Finance Act 2012, which explicitly included power generation for additional depreciation, did not negate the established legal position that electricity generation is a manufacturing process.

Application of law to facts

The CIT(A) applied the principle that in the absence of a jurisdictional High Court decision, the view favorable to the assessee should be adopted. The CIT(A) concluded that the generation of electricity qualifies as the production of an article or thing, thus making the assessee eligible for the investment allowance under section 32AC.

Treatment of competing arguments

The Revenue argued that the CIT(A) relied on case law related to section 32(1)(iia), which was not directly applicable to section 32AC. However, the CIT(A) and the Court found that the principles established in those cases were applicable to the interpretation of section 32AC as well, given the similar language and intent of the provisions.

Conclusions

The Court concluded that the CIT(A) correctly allowed the investment allowance under section 32AC, as the generation of electricity is considered the production of an article or thing. The appeal by the Revenue was dismissed.

SIGNIFICANT HOLDINGS

The Court preserved the principle that when two interpretations of a taxing statute are possible, the one favorable to the assessee should be adopted. This principle was supported by several Supreme Court decisions cited by the CIT(A), such as CIT v. Kulu Valley Transport Co. (P.) Ltd. and CIT v. Vegetables Products Ltd.

The Court upheld the CIT(A)'s determination that the generation of electricity qualifies as the production of an article or thing, thereby entitling the assessee to the investment allowance under section 32AC. The Court found no contrary jurisdictional High Court decision to challenge this interpretation.

The final determination was that the appeal by the Revenue was dismissed, affirming the CIT(A)'s order in favor of the assessee.