Sai Regency Power Corporation Pvt. Ltd., V. Dy Commissioner of Income Tax, Hyderabad

ITA 1421/HYD/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98510 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 15-09-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 29-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KONDA RAMESH
• Assessee Lawyers: S RAMA RAO
• Keywords: Depreciation; Additional depreciation; Capital receipt
• Section: 143(3); 32

Judgement Text

ITA NO.1421 OF 2013 SAI REGENCY POWER CORPORATION P LTD HYDERABAD PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.1421/HYD/2013 (ASSESSMENT YEAR: 2007-08) SAI REGENCY POWER CORPORATION PRIVATE LIMITED HYDERABAD PAN: AACCR 6134 R VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(1), IT TOWERS HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI S. RAMA RAO FOR REVENUE : SHRI KONDA RAMESH, CIT (DR) DATE OF HEARING : 15 .09 .20 15 DATE OF PRONOUNCEMENT : 23 .09. 2015 O R D E R PER SMT.P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR A.Y 2007-08. IN THIS APPEAL, ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT (A) I N CONFIRMING THE DISALLOWANCES OF (I) ADDITIONAL DEPRECIATION OF RS. 13,85,19,028 U/S 32(1)(IIA) OF THE ACT AND (II) NOT ALLOWING DEP RECIATION AT RS.5,91,10,110 U/S 32 OF THE ACT AND ALSO (III) NOT ADJUDICATING AS TO WHETHER THE SUM OF RS.27,76,173 REPRESENTS CA PITAL RECEIPT OR NOT. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, ENGAGED IN THE BUSINESS OF GENERATION AND DISTRIBUT ION OF POWER HAS FILED ITS RETURN OF INCOME FOR A.Y 2007-08 ON 2 9.10.2007 DECLARING INCOME OF RS.30,14,740. DURING THE ASSESS MENT PROCEEDINGS U/S 143(3) OF THE I.T. ACT, AO OBSERVED THAT THE ASSESSEE HAS CLAIMED DEPRECIATION U/S 32 OF THE ACT AND ALSO ITA NO.1421 OF 2013 SAI REGENCY POWER CORPORATION P LTD HYDERABAD PAGE 2 OF 7 ADDITIONAL DEPRECIATION U/S 32(IIA) OF THE ACT. AO OBSERVED THAT FOR HIGH TECHNOLOGY AND HIGH VALUE PROJECTS, THEY A RE GENERALLY GIVEN ON EPC (ENGINEERING PROCUREMENT AND CONSTRUCT ION) BASIS IN WHICH ALL THE ACTIVITIES INCLUDING DESIGN, ERECT ION AND COMMISSIONING OF THE PROEJCTS IS AWARDED ON A TURNK EY BASIS TO A CONTRACTOR, WHO IN TURN CAN COMMISSION SUB CONTRACT ORS OR EXECUTE WORK ON ITS OWN. HE OBSERVED THAT IN A POW ER GERNERATION PROJECT, VARIOUS MILESTONES, IN SEQUENT IAL ORDER, ARE TO BE CARRIED OUT AND AT THE COMPLETION STAGE INCLU DE SYNCHRONISATION, COMMISSIONING AND COD (DATE OF COM PLETION). HE OBSERVED THAT AFTER BOILERS, COOLING TOWERS, CHI MNYES, ESPS (ELECTROSTATIC PRECIPITATORS), SWITCHYARD CONTROL R OOM ETC., ARE ERECTED AND CIVIL WORKS ARE COMPLETED, SYNCHRONISAT ION TO THE GRID IS CARRIED OUT. AFTER TRIAL RUN, COMMISSIONING IS UNDERTAKEN AND THE EPC CONTRACTOR FINALLY HANDS OVER THE PROJE CT WHEN IT ATTAINS COD STATUS AND IT IS AT THIS POINT OF TIME THAT A PROJECT CAN BE SAID TO BE IN USE IN CONTRAST TO ITS EARLI ER STAGE OF READY TO USE. HE OBSERVED THAT IN THE ASSESSEES CASE, M/S. TOYO ENGINEERING LTD HANDLED THE EPC CONTRACT AND THEREF ORE, ACCORDING TO HIM IT IS ONLY M/S TOYO ENGINEERING LT D THAT COULD GIVE A CERTIFICATE OF COMPLETION. ASSESSEE WAS THER EFORE, ASKED TO SUBMIT CERTIFICATES INCLUDING THE DETAILS OF INSTAL LATION ETC. IN RESPONSE, ASSESSEE SUBMITTED A COPY OF THE CERTIFIC ATE FROM TNEB (TAMIL NADU ELECTRICITY BOARD) WHICH CERTIFIED THAT WE ARE GLAD TO INFORM THAT M/S SAI REGENCY POWER PLANT WAS PARA LLELED TO THE TNEB GRID SUCCESSFULLY AT 20.05 HRS ON 08.02.2007 T HROUGH THE NEWLY ERECTED 110KV DC LINE' . AO OBSERVED THAT IN THE SAID LETTER, MENTION WAS MADE ABOUT PARALLELING TO THE G RID I.E. SYNCHRONISATION TO THE GRID ONLY, WHICH IS PRIOR TO THE TRIAL RUN. HE OBSERVED THAT ANOTHER LETTER FROM TNEB FILED BY THE ASSESSEE STATES THAT WE ARE GLAD TO INFORM THAT M/S SAI REG ENCY POWER ITA NO.1421 OF 2013 SAI REGENCY POWER CORPORATION P LTD HYDERABAD PAGE 3 OF 7 CORPORATION PVT LTD HAVE SUCCESSFULLY SYNCHRONISED WITH TNEB GRID AT 23.40 HRS ON 12.01.2007 FOR TRIAL RUN. TH US, HE OBSERVED THAT THIS CERTIFICATE IS ALSO FOR THE PURP OSE OF TRIAL RUN ONLY AND THEREFORE, IN TECHNICAL TERMS IT MEANS THA T THE PROJECT HAS NOT ACHIEVED COD AND IS NOT PUT TO USE WHICH ARE THE PRE- REQUISITES FOR ALLOWANCE OF THE DEPRECIATION U/S 32 OF THE ACT. FURTHER, ASSESSEE HAD ALSO STATED THAT IT HAD OFFER ED INCOME FROM SALE OF ELECTRICITY AND THEREFORE, IT IS CLEAR THAT THE ASSESSEE HAS STARTED THE COMMERCIAL PRODUCTION OF ELECTRICITY, B UT THE AO HAS ENORMOUSLY HELD THAT THE INCOME SHOWN FROM SALE OF ELECTRICITY AT THE FAG END OF THE YEAR IS INCIDENTAL TO TRIAL RUN ONLY AND DOES NOT ENTITLE THE ASSESSEE TO CLAIM ANY DEPRECIATION. HE FURTHER OBSERVED THAT THE ASSESSEE HAS REACHED A CAPACITY O F 20 MW AS AGAINST THE FULL CAPACITY OF THE PROJECT I.E. 58MW PER DAY. THEREFORE, HE HELD THAT UNLESS THE CAPACITY OF THE PLANT REACHES THE PROPOSED LEVEL OF GENERATION, THE EPC CONTRACT/ GUARANTEE PERIOD WOULD NOT BE RECKONED TO START. HE THEREFORE , DISALLOWED THE DEPRECIATION U/S 32 OF THE ACT. AS REGARDS THE CLAIM OF ADDITIONAL DEPRECIATION U/S 32(IIA) OF THE ACT, AO OBSERVED THAT THE SAME IS ALLOWABLE ONLY, IF AN ASSESSEE IS ENGAG ED IN THE BUSINESS OF MANUFACTURE OR PRODUCTIOIN OF ANY ARTIC LE OR THING AND SINCE ACCORDING TO HIM, POWER IS NEITHER AN ART ICLE NOR A THING, HE HELD THAT THE ASSESSEE IS NOT ELIGIBLE FO R ADDITIONAL DEPRECIATION U/S 32(IIA) OF THE ACT. HE THEREAFTER COMPUTED THE INCOME OF THE ASSESSEE BY STARTING WITH THE NET LOS S AS PER THE P&L A/C OF RS.(22,72,765) AND ARRIVED AT THE TOTAL INCOME OF RS.20,04,28,493. AGGRIVED, ASSESSEE PREFERRED AN AP PEAL BEFORE THE CIT (A), WHO CONFIRMED THE ORDER OF THE AO ON B OTH THE ISSUES I.E. ON THE ISSUE OF DEPRECIATION U/S 32 AND ALSO A DDITIONAL DEPRECIATION U/S 32(IIA) OF THE I.T. ACT. ITA NO.1421 OF 2013 SAI REGENCY POWER CORPORATION P LTD HYDERABAD PAGE 4 OF 7 3. AS REGARDS THE INTEREST INCOME OF RS.30,14,740 R ECEIVED BY THE ASSESSEE AND TREATED AS INCOME FROM OTHER SOUR CES BY THE AO, CIT (A) OBSERVED THAT THE ASSESSEE HAS RECEIVED INTEREST INCOME FROM GAIL INDIA LTD OF RS.24,90,132, SBI BAN GALORE FOR A SUM OF RS. 7,01,936, INDIAN OVERSEAS BANK, CHENNAI, RS.99,200 AND RS.1,79,589 FROM BANK OF MAHRASHTRA, HYDERABAD AND THAT THE ASSESSEE HAS CLAIMED ALL THESE INCOMES AS INCOM E FROM BUSINESS, WHEREAS THE AO HAS TREATED IT AS INCOME F ROM OTHER SOURCES. THE CIT (A) OBSERVED THAT SIMILAR ADDITION S HAVE BEEN DELETED BY THE CIT (A) FOR A.Y 2005-06 AND 2006-07 WHEREIN THEY WERE HELD TO BE CAPITAL RECEIPTS AND CONSEQUENTLY G O TO REDUCE THE PROJECT COST. THE CIT (A) HOWEVER, HELD THAT TH ERE WAS CRUCIAL DIFFERENCE OF FACTS BETWEEN THE YEAR IN APPEAL AND THE PRECEDING ASSESSMENT YEAR I.E 2006-07, WHERE ASSESSEE ITSELF HAS RETURNED THESE RECEIPTS AS INCOME FROM OTHER SOURCES. THE C IT (A) THEREFORE, REFUSED TO ADMIT THE ADDIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE AND CONFIRMED THE ORDER OF THE AO. AGGRIEVED BY THE ORDER OF THE CIT (A), ASSESSEE IS IN SECOND APP EAL BEFORE US. 4. AS REGARDS THE DISALLOWANCE OF CLAIM OF ADDITION AL DEPRECIATION U/S 32(1)(IIA) OF THE ACT IS CONCERNED , THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ONLY GR OUND ON WHICH ADDITIONAL DEPRECIATION HAS BEEN DISALLOWED T O THE ASSESSEE IS THAT ACCORDING TO THE AUTHORITIES BELOW , POWER IS NOT AN ARTICLE OR THING. THE LEARNED COUNSEL FOR THE AS SESSEE HAS RELIED UPON THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF NTPC LTD WHEREIN THE HON'BLE HIGH COURT HAS HELD THAT THE GENERATION OF POWER IS MANUFACTURE/PRODUCTION OF AN ARTICLE OR THING. HOWEVER, WE FIND THAT THE AO AND THE CIT (A) HAVE REFUSED TO FOLLOW THIS DECISION ON THE GROUND THAT THE DECISION WAS RENDERED IN THE YEAR 2002 I.E. PRIOR TO THE AME NDMENT TO ITA NO.1421 OF 2013 SAI REGENCY POWER CORPORATION P LTD HYDERABAD PAGE 5 OF 7 SECTION 32(1)(IIA) OF THE ACT AND THEREFORE, THE GE NERATION OF POWER IS NOT ELIGIBLE FOR ADDITIONAL CLAIM OF DEPRECIATIO N. 5. HAVING REGARD TO THE RIVAL CONTENTIONS, WE FIND THAT IN THE CASE OF NTPC LTD V. DY. COMMISSIONER OF INCOME TAX (ITA NO.1438/DEL/2009), THE TRIBUNAL AT DELHI WAS SEIZED OF THE ISSUE AS TO WHETHER THE GENERATION OF POWER IS AKIN TO MA NUFACTURE OR PRODUCTION OF ARTICLE OR THING AND WHETHER THE ASSE SSEE, ENGAGED IN ACTIVITY OF GENERATION OF ELECTRICITY, WOULD BE ENTITLED TO ADDITIONAL DEPRECIATION U/S 32(1)(IIA) OF THE ACT. THE COORDINATE BENCH OF THIS TRIBUNAL AT PARA 19 OF ITS ORDER HAS HELD AS UNDER: 19. IN THIS CASE, ASSESSEE WAS CARRYING ON BUSINESS OF CONVERSION OF JUMBO ROLLS OF PHOTOGRAPHIC FILMS INTO SMALL FLA TS AND ROLLS IN DESIRED SIZES. IT CLAIMED DEDUCTION UNDER SEC. 80-H H AND 80-I AS WELL AS INVESTMENT ALLOWANCE UNDER SEC. 32AB. THE C ONTROVERSY AROSE WHETHER CONVERSION OF JUMBO ROLLS INTO SMALL SIZES AMOUNTS TO MANUFACTURE OR PRODUCTION, ELIGIBLE FOR DEDUCTIO N UNDER SEC. 32AB OR DEDUCTION UNDER SECTIONS 80-HH AND 80-I OF THE INCOME- TAX ACT, 1961/ HON'BLE SUPREME COURT HAS HELD THAT THIS ACTIVITY AMOUNTS TO MANUFACTURE OR PRODUCTION. THUS, WE THIN K IT IS NOT NECESSARY TO RECAPITULATE AND RECITE ALL THE DECISI ON ON THE CONSTRUCTION EXPRESSION 'MANUFACTURE'. BUT SUFFICE TO SAY THAT CORE OF ALL THE DECISIONS OF THE HON'BLE SUPREME COURT O R HON'BLE HIGH COURT IS TO THE EFFECT THAT BROADLY MANUFACTURE IS A TRANSFORMATION OF AN ARTICLE, WHICH IS COMMERCIALLY DIFFERENT FROM THE ONE WHICH IS CONVERTED. IT IS A CHANGE OF ONE OBJECT TO ANOTHER FOR THE PURPOSE OF MARKETABILITY. IT BRINGS SOMETHING INTO EXISTENC E, WHICH IS DIFFERENT FROM THAT, WHICH ORIGINALLY EXISTED. THE NEW PRODUCT IS A DIFFERENT COMMODITY PHYSICALLY AS WELL AS COMMERCIA LLY. THE HON'BLE COURT ALSO EXPLAINED BROADER TEST TO DETERM INE WHETHER MANUFACTURE IS THERE OR NOT, IT IS PROPOUNDED THAT WHEN A CHANGE OR SERIES OF CHANGES ARE BROUGHT OUT BY APPLICATION OF PROCESSES WHICH TAKE THE COMMODITY TO THE POINT WHERE, COMMER CIALLY, IT CANNOT BE REGARDED AS THE ORIGINAL COMMODITY BUT IS , INSTEAD RECOGNIZED AS A DISTINCT AND NEW ARTICLE THAT HAS E MERGED AS A RESULT OF THE PROCESS . 6. THOUGH THIS JUDGMENT OF THE TRIBUNAL IS PRIOR TO THE AMENDMENT BROUGHT-IN IN SECTION 32(1) (IIA) OF THE ACT, WE FIND THAT AFTER THE AMENDMENT THE GENERATION OF POWER HA S BEEN ITA NO.1421 OF 2013 SAI REGENCY POWER CORPORATION P LTD HYDERABAD PAGE 6 OF 7 BROUGHT WITHIN THE AMBIT OF SECTION 32(1)(IIA) OF T HE ACT IN CONSONANCE WITH THE DECISIONS OF THE COURTS ON THIS ISSUE. THEREFORE, THIS DECISION IS VERY MUCH APPLICABLE TO THE FACTS OF THE CASE BEFORE US AND THE ASSESSEE IS ELIGIBLE FOR CLAIM OF ADDITIONAL DEPRECIATION U/S 32(IIA) OF THE ACT. WE HOLD ACCORDINGLY. 7. AS REGARDS THE CLAIM OF DEPRECIATION U/S 32 OF T HE ACT, WE FIND THAT THE GRIEVANCE OF THE REVENUE IS THAT THE ASSESSEE HAS NOT PUT THE MACHINERY TO USE TO BE ELIGIBLE FOR DEP RECIATION U/S 32. ASSESSEE HAS RELIED UPON THE LETTERS GIVEN BY T HE TNEB TO DEMONSTRATE THAT THE ASSESSEE HAS SYNCHRONIZED WITH THE GRID TNEB AND ALSO HAS TRIAL RUN THE MACHINERY AND HAS D ERIVED INCOME THERE FROM WHICH HAS BEEN OFFERED AS INCOME FROM BUSINESS WHICH WAS ALSO ACCEPTED BY AO. FROM ALL TH ESE FACTS, IT IS EVIDENT THAT THE ASSESSEE HAS STARTED COMMERCIAL PRODUCTION DURING THE RELEVANT FINANCIAL YEAR AND THIS IS NOT POSSIBLE UNLESS AND UNTIL THE ASSESSEE HAS PUT THE PLANT AND MACHIN ERY TO USE. THEREFORE, WE AGREE WITH THE CONTENTION OF THE LEAR NED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS PUT TO USE T HE MACHINERY AND IS ELIGIBLE FOR THE DEPRECIATION U/S 32 OF THE ACT. THESE TWO GROUNDS OF APPEAL ARE ACCORDINGLY ALLOWED. 8. AS REGARDS THE ADDITIONAL GROUND OF APPEAL NOT A DMITTED BY THE CIT (A), WE FIND THAT IT IS A LEGAL GROUND AND THE CIT (A) OUGHT TO HAVE ADMITTED THE SAME AND ADJUDICATED THE SAME AFTER CALLING FOR A REMAND REPORT, IF NECESSARY FROM THE AO. IN VIEW OF THE SAME, WE DEEM IT FIT AND PROPER TO ADMIT THE SA ID ADDITIONAL GROUND OF APPEAL AND REMAND THE ISSUE TO THE FILE O F THE AO TO VERIFY THE DETAILS FILED BY THE ASSESSEE AND ALSO T O ADJUDICATE AND ITA NO.1421 OF 2013 SAI REGENCY POWER CORPORATION P LTD HYDERABAD PAGE 7 OF 7 WHETHER IF IT IS A CAPITAL RECEIPT AND GOES TO REDU CE THE PROJECT COST OR IT IS INCOME FROM OTHER INCOME. IT IS NEEDL ESS TO MENTION THAT THE ASSESSEE SHOULD BE GIVEN A FAIR OPPORTUNIT Y OF HEARING. 9. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD SEPTEMBER, 2015. SD/ - SD/ - ( B. RAMAKOTAIAH ) ( P. MADHAVI DEVI ) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 23 RD SEPTEMBER, 2015. VNODAN/SPS COPY TO: 1. M/S. SAI REGENCY POWER CORPORATION (P) LTD, 8-2-293 /82/A/ 431/A, ROAD NO.22 JUBILEE HILLS, HYDERABAD 500033. 2. DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(1),, IT TO WERS, HYDERABAD 3. CIT (A)-IV HYDERABAD 4. CIT III HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER