depreciation in case of electricity company

“1. Faceless Penalty Scheme 2021- Decoding the New Rules of Penalty Shoot-out: !! For that on the facts and in the circumstances of the case, in the assessment order passed under section 143(3) while allowing deduction for additional depreciation under section 32(1)(iia) the assessing officer having followed one of the course permissible in law, the CIT was unjustified in invoking his revisionary power under section 263 of the Act & holding the assessment to be erroneous. In the instant case, the assessee had set up hydel power and thermal power plant, wherein the water and coal gets converted into electricity through the manufacturing process. Hence, it could be safely concluded that the assessee is entitled for claiming additional depreciation under section 32(1)(iia) of the Act even prior to the amendment brought in by Finance Act, 2012. In a business venture, the major determinant of whether there will be continuity or discontinuity is cost. (supra). Electricity Board AIR 1970 SC 732. an electric transformer), a reasonable projection of the overall remaining life of the asset account can be determined. The energy so produced in law constituted “goods”. 6. The Delhi Bench of the ITAT decided the appeal of NPTC Ltd. v. Dy. It was further clarified in the Finance Act, 2012 that additional depreciation is allowable with effect from assessment year 2013-14 in the case of generation or generation and distribution of power as this category was inserted with effect from 1-4-2013. Aggrieved, the assessee is in appeal before us on the following grounds :–. 227,00,22,060 after making dis allowance under section 14A of the Act in the sum of Rs. Damodar Valley Corporation Vs. Dy. 24 [Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc. The various apex court decisions relied upon by the assessee before the learned CIT as mentioned supra in the context of levy of sales tax on the sale of electricity had also decided that the generation of electricity amounts to production of article or thing. Send us an email at info@aldrichadvisors.com. Now the question to be decided is as to whether the assessee engaged in generation and distribution of electricity could be said to be engaged in the business of manufacture or production of any article or thing so as to be eligible for claiming additional depreciation under section 32(1)(iia) of the Act. The model is designed to adapt to the different quantity and detail of data our clients have available in order to utilize the depreciation system that will produce the most accurate results. 7. Similar views were also expressed in the following decisions :–, CIT v. Hi Tech Arai Ltd. (2010) 321 ITR 477 (Mad), CIT v. Texmo Precision Castings (2010) 321 ITR 481 (Mad), CIT v. Atlas Export Enterprises (2015) 373 ITR 414 (Mad), Asst. Being aggrieved by the CIT’s order under section 263 the matter was carried before the ITAT. Changing utility practices, market, technology, and regulatory forces can also alter even the best projections. In the result, the appeal of the assessee is allowed. For the sake of convenience, the show cause notice is reproduced here under :–. Assumed that you purchase a scissor of 100 yen. 517 (Kol.) Every loss of revenue as a consequence of an order of the assessing officer cannot be treated as prejudicial to the interest of the revenue. In order to submit a comment to this post, please write this code along with your comment: 769aff7bd8e6bec09ac4faec1a4f6487. At the outset, we find that on perusal of section 32(1)(iia) of the Act as it stood upto assessment year 2012-13, it is evident that the additional depreciation is permissible to all assessees who are engaged in the business of manufacture or production of any article or thing. In the circumstances, the assessee who is desirous of claiming the additional depreciation need only to prove that during the relevant year he was engaged in the business of manufacture or production of any article or thing. 72A. It would be pertinent to understand the question raised before the Hon’ble Madras High Court which is reproduced here under :–, “Whether on the facts and in the circumstances of the case the Tribunal was right in holding that generation of power by windmill would amount to manufacture or production of any article or thing?”, It was contended that the Hon’ble Madras High Court was specifically seized of the question as to whether an assessee engaged in the business of generation of power can be said to be engaged in manufacture or production of an article and hence qualified for claiming additional depreciation under section 32(1)(iia) of the Act. Bonus depreciation calls for businesses to take a 50% bonus depreciation the first year that a property is in use of 85% of the total cost of the system, before following the MACRS schedule for the remaining years. Where R = Rate of Depreciation (in %) Sir In Case Of Addition for FY 2019-20 It is Taking Wrong Rate of Depreciation For SLM. A basic principle to ratemaking is to only charge customers for assets that are used to provide them service. 517 (Kol.) What’s the Right Corporate Structure for Your Organization? Gross profit is the result of subtracting a company's cost of goods sold from total revenue. The Supreme Court observed that the term “goods” has to be understood in a wider sense and merely because electric energy is not tangible or cannot be moved does not cease to be “goods”. We also find that the co-ordinate bench decision of this tribunal in the case of ACIT v. Ankit Metal & Power Ltd. [IT Appeal No. Ltd. (2002) 127 STC 280 (SC). Therefore, the determination of how quickly to recover the investment through depreciation will greatly impact ratepayers and the utility. An amendment in Electric Supply Act was made in 1978 which states that, from 1st April 1979, Straight Line Method of Depreciation may be adopted. if a company uses Written Down Value (WDV) method of depreciation, it will need to calculate a new rate for depreciation to depreciate the asset over their remaining useful life using the formula for calculation of rate for depreciation as per WDV method which is reproduced below – R= {1 – (s/c)^1/n } x 100. We find that the learned CIT had changed his track from originally stating that the order passed by the learned assessing officer had incorrectly applied the provisions of section 32(1)(iia) of the Act for the assessment year 2011-12, to ‘lack of inquiry’ on the part of the learned assessing officer with regard to the claim of additional depreciation. Due to the complexity and volume of the calculations, a reliable computer model is imperative for the preparation of most depreciation studies. The assessee stated before the learned CIT that one of the case involving identical issue was that of NTPC Ltd a public sector undertaking whose principal business is generation of Thermal Power. As a result, depreciation and amortization are not usually included in the calculation of gross profit. The learned CIT issued show cause notice dated 31-7-2015 seeking to revise the assessment framed under section 143(3) of the Act in as much as the learned assessing officer had granted the claim of additional depreciation to the assessee company in the sum of Rs. 4.3. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. CIT (2012) 54 SOT 177. Conversely, insufficient depreciation expense will result in lower rates, decreased cash flow for the utility, and a greater return on the utility’s investment as the plant remains in rate base longer. The assessee in that case contended before the Court that “electricity” generated was not “goods” as it did not have any physical existence or attributes or mass which “goods” possess. This formula is unknown to the average utility customer, yet utility executives, wonks, and regulators know it by heart. 5. In view of these decisions, the view taken by the learned assessing officer cannot be treated as unsustainable in law. If a business employs a usage-based depreciation methodology, then depreciation will be incurred in a pattern that is more consistent with a variable cost. The assessee also submitted that no appeal was preferred by the revenue to the Hon’ble Delhi High Court against the order of the Delhi Tribunal supra. In the case of Agarwal Transformers P.Ltd the Tribunal allowed higher depreciation @ 30% on the reasoning that generator is a renewable energy device. : Proceedings under section 263 of the Income Tax Act, 1961 in the case of M/s. In the instant case, the assessee had set up hydel power and thermal power plant, wherein the water and coal gets converted into electricity through the manufacturing process. For example, when an Income Tax officer adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income tax officer is sustainable in Law.’. NAT 1996-6.2020. According to CIT in common parlance the expression “article or thing” meant to be something which was tangible or moveable. 2. In its order the Tribunal upheld the CIT’s power to invoke revisionary jurisdiction and also upheld CIT’s order with regard assessment of power tariffs with reference to provisional tariff approved by CERC. In this case, we assume the 'depreciation basis' is the Net Cost (after incentives) and then we add back 50% of the federal tax credit. “Sub. In the said order the CIT held the assessing officer’s order granting additional deprecation to be erroneous on the ground that the assessee was not engaged in the business of manufacture or production of any article or thing. The purpose of the depreciation expense is to recover the utility’s plant investment incrementally throughout the service life of the asset. It was contended that in the aforesaid decisions, the asst year involved was prior to assessment year 2013-14. Accordingly the Chennai Tribunal dismissed the departmental appeal after taking note of the amendment in section 32(1)(iia) of the Act by the Finance Act, 2012. COVID-19 ALERT: All Aldrich office locations are currently closed until further notice. 3(ii)] MINISTRY OF POWER. In case WDV method opted, it will be done same as it is done for normal assessee In case SLM Method followed:- If Selling price is less than WDV Value, difference is written of as terminal depreciation If Selling Price > WDV (but less than actual cost),then difference is PGBP Income u/s 41 If Selling Price>Actual Cost ,then Property registration not must for constituting ‘Transfer’ as per pre-amended section 53A of TPA Act, No TDS on discount/rebate allowed to dealers/distributors on sale of products, Non Woven Bags manufactured through intermediate product Non Woven fabric classifiable under Heading No. https://efinancemanagement.com/financial-accounting/depreciation For that on the facts and in the circumstances of the case the appellant Corporation being engaged in the business of generation of power; was entitled to additional depreciation under section 32(1)(iia) since it was engaged in production of an article or thing and in that view of the matter was entitled to additional depreciation and hence order of assessment granting deduction for additional depreciation was not erroneous. In the production department of a manufacturing company, depreciation expense is considered an indirect cost, since it is included in factory overhead and then allocated to the units manufactured during a reporting period. By minimizing the operating expenses, rates can be lowered. Hence the apex court decision in the case of CIT v. Amitabh Bachchan also would not advance the case of the revenue in the facts and circumstances of the case. Assessment was framed by JCIT, Range-9, Kolkata under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for assessment year 2011-12 vide his order dated 28-3-2014. In addition, this exceptional depreciation cannot exceed €15 million per company and per investment project. 1. The return of income for the assessment year 2011-12 was filed by the assessee on 28-9-2011 declaring loss of Rs. Though calculating a depreciation rate is simple in concept, the realities of utility operation, the significance of the result, the obscurity of the future, and the need to provide a rationale and supportable defense of the final rate introduces several complexities into the calculation. 6.2. In the decided case the State Electricity Board generated and distributed electricity energy to various consumers. 4.1. The assessee also placed on record before the learned CIT the decision of the Hon’ble Madras High Court in the case of CIT v. VTM Ltd. (2009) 319 ITR 336 (Mad) wherein, the Hon’ble Madras High Court dismissed the revenue’s appeal. In this case, the company has an option to depreciate the asset using either 10 year life prescribed in the Schedule II or the estimated useful life, i.e., 12 years. Income Tax Depreciation is a positive decline in the real value of tangible assets due to consumption, wear and tear or obsolescence. An Electricity company has financed the project costing Rs.200 lakhs by 70% Debt & 30% Equity. Because of the vast number of utility assets, the years of historical experience and the computational challenges of the calculations, specialized computer models are universally used to crunch the numbers. It was also submitted that the similar claims were allowed to the assessee commencing from assessment year 2005-06 on wards under section 143(3) proceedings and there is no reason to disturb the same during assessment year 2011-12 alone. The assessment was completed under section 143(3) of the Act on 28-3-2014 determining the total loss at Rs. FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-. Please help on how to solve it or Provide the updated utility. NOTIFICATION. The Tribunal accordingly held that the benefit of additional depreciation under section 32(1)(iia) could not be denied to the assessee. The Tribunal further held that the process of power generation was akin to manufacture or production of an article or thing. The ROI was e-field on 28-9-2011 declaring a total income at NIL. Moreover, the learned assessing officer had the benefit of the very same issue being allowed as allowance in all the earlier asst years commencing from assessment year 2005-06 on wards in section 143(3) proceedings. Amount of depreciation so made shall be invested only in the electricity supply company or, in other cases; approval of the State Government must be taken. 6,37,45,348. Visit our COVID-19 Resource Center to learn about our continued service and additional support for you during this time. The assessee replied to the learned CIT in response to show cause notice that section 32(1)(iia) has come in force with effect from 1-4-2005 provides that any assessee which is engaged in the business of manufacture or production of any article or thing is entitled to claim additional depreciation @ 20% of the actual cost in respect of new machinery or plant acquired and installed in the relevant previous year. 4/2A, Aayakar Bhawan, 4th Floor along with your written submission as to why the above assessment made under section 143(3) dated 28-3-2014 for 2011-12 should not be revised under section 263 of the Income Tax Act, 1961. The brief facts of this issue is that the assessee is a public sector undertaking engaged in the business of generation and distribution of electricity. Reserve is created by transferring from the Revenue Account every year an amount equivalent to not less than 1/4 per cent and not more than 1/2 per cent of the original cost of the fixed assets until it equals 5 per cent of the original cost of the fixed assets. Room No. After due consideration of the facts and the question raised before it, the Hon’ble Madras High Court dismissed the revenue’s appeal by holding that the assessee engaged in the business of generation of power fulfilled the condition of production of any article or thing as contemplated in section 32(1)(iia) of the Act and accordingly eligible for additional depreciation. Tax depreciation is the means by which a taxpaying entity writes off its qualifying capital expenditure on plant & machinery against its profits, thus reducing its level of taxation. We are of the view that the learned assessing officer had adjudicated this issue on a right footing in so far as he has followed the judicial discipline in following the various decisions of the Hon’ble Apex Court, Madras High Court, Gujarat High Court, Chennai Tribunal, Bangalore Tribunal and the Jurisdictional Kolkata Tribunal and allowed the claim of additional depreciation to the assessee, though not discussed about the same in his assessment order. Maintained by V2Technosys.com, Appeal Number : IT Appeal No. Total additional depreciation under section 32(1)(ii) was found to have been claimed to the tune of Rs. 4. In case of any new machinery or plant which has been acquired and installed by an assessee engaged in the business of generation or generation and distribution of power a further sum equal to 20%, of the actual cost of such machinery or plant shall be allowed as deduction. 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depreciation in case of electricity company 2021