M/S.tenzing Match Worksboopathy Buildings, Virudhunagar Roadsivakasi v. The Deputy Commissioner Of Income Tax Circle I, Virudhunagar

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE MR.JUSTICE T.S.SIVAGNANAMANDTHE HON'BLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case (Appeal) Nos.655, 656 and 657 of 2009 M/s.Tenzing Match WorksBoopathy Buildings, Virudhunagar RoadSivakasi, PAN : ...Appellant in all the appeals - Vs - 1.The Deputy Commissioner of Income Tax Circle I, Virudhunagar ..Respondent in TCA No.655 of 2009 2. The Assistant Commissioner of Income Tax, Circle I, Virudhunagar. ..Respondent in TCA No.656 & 657 of 2009 Prayer : Appeals under Section 260A of the Income Tax Act, 1961,against the common order dated 27.01.2009 passed by the IncomeTaxAppellateTribunal“B”Bench,ChennaiinI.T.A.Nos.462/MDS/2008, 474/MDS/2008 and Cross ObjectionNo.59/MDS/2008 in ITA No.474/MDS/2008 for the assessment year2005-2006, preferred against the order passed by theCommissioner of Income Tax(Appeals)-II, Madurai dated 27.12.2007for the assessment year 2005-2006 against the order dated21.09.2007 passed by the Deputy Commissioner of Income Tax,Circle I, Virudhunagar under section 143(3) of the Income TaxAct, 1961 Madurai PANGIR No.AABFT5787A For Appellant : M/s.A.S.Sriraman For Respondent : Ms.S.Premalatha, Junior Standing Counsel for M/s.M.Swaminathan C OM M O N J U D G M E N T(Judgment of the Court was delivered by T.S.SIVAGNANAM, J.) These appeals by the assessee is filed under Section 26A ofthe Income Tax Act, 1961 as directed against the common orderdated 27.01.2019 passed by the Income Tax Appellate Tribunal, https://hcservices.ecourts.gov.in/hcservices/ Chennai “B” Bench in I.T.A.Nos.462/MDS/2008, 474/MDS/2008 andCross Objection No.59/MDS/2008 for the assessment year 2005-06.The appeals have been admitted by the order dated 27.10.200 onthe following substantial questions of law. “1. Whether the Appellate Tribunal iscorrect in law in rejecting the claim ofdeprecitation on the wind mill even thoughthe said wind mill was commissioned as wellas started generation of electricity basedon the materials placed on record? 2. Whether the Appellate Tribunal iscorrect in law in sustaining the action ofthe respondent in rejecting the claim ofadditional depreciation as a consequence tothe rejection of depreciation on the factsand in the circumstances of the case?” 2. The assessee is a partnership firm engaged in thebusiness of manufacture of safety matches; it filed its returnof income for the Assessment Year under consideration 2005-06on 31.03.2005, admitting a total income of Rs.23,47,370/-. Thereturn was processed under Section 143(1) of the Act andsubsequently, the case was selected for scrutiny and afterdiscussion, the assessment was completed under Section 143(3)of the Act, by an order dated 21.09.2007. Two issues arose inthe assessment proceedings, which were decided against theassessee viz., the claim for depreciation in respect of onewind mill established by the assessee and the claim foradditional depreciation on the very same wind mill. TheAssessing Officer was of the view that the assessee did notgenerate the electricity before the end of the assessment yearie., on 31.03.2005 and what was generated was less than oneunit and the actual generation took place on 31.03.2004 andtherefore, the wind mill cannot be stated to have been used bythe assessee for the purpose of business. Since the claim fordepreciation was rejected, the claim for additionaldepreciation was also rejected. The assessee preferred appealbefore the Commissioner of Income Tax (Appeals)-II, Madurai[hereinafter referred to as CIT (A)]. 3. The CIT(A), by an order dated 27.12.2007 allowed theappeal in part viz., that the assessee is entitled for theclaim for depreciation, but rejected the claim for additionaldepreciation, by relying upon the decision of the ChennaiTribunal in I.T.A.Nos.307/Mds/2000 dated 06.09.2005. Theassessee filed an appeal as against that portion of the order,which was decided in favour of the revenue and the Revenuefiled an appeal against that portion of the order, which wasdecided in favour of the assessee, and the assessee also filedcross objection. The tribunal, by the impugned order, rejected the case of the assessee in its entirety ie., itrejected the claim for depreciation and held that if the claimfor depreciation has been rejected, the claim for additionaldepreciation should also be rejected. This is how the assesseeis before us by way of these appeals. 4. The answer to the substantial question of law No.1hinges upon the interpretation to be given to Section 32 (1)(iia). The said provision states that in respect ofdepreciation of machinery or plant (other than ships and aircrafts) owned wholly or partly by the assessee and used for thepurpose of business, deduction shall be allowed. The tribunal,by interpreting the term “used”, relied upon the decision inthe case of “The Deputy CIT -Vs- Yellamma Dasappa Hospital(2007 290 ITR 353 Kar), “CIT -Vs- Maps Tours and Travels (2003260 ITR 655 Mad), “Dineshkumar Gulabchand Agrawal -Vs- CIT(2004) 267 ITR 768 (Bom) and “B.Malini and Co., -Vs- CIT (1995)214 ITR 192 (Bom). 5. Before we consider the applicability of these decisions,we need to take note of the following facts, which is veryrelevant in the instant case. As mentioned above, the assesseeestablished a wind mill and it is the case of the assessee thatelectricity generation commenced from 31.03.2005. Thecompetent authority to certify this is the Tamil NaduElectricity Board, from whom the assessee obtained acertificate dated 02.04.2005, from the Executive Engineer (M&O)(Wind Mill), Palladam. This certificate shows that the assesseehad effected supply of electricity to the Board on 31.03.2005.Further, statement was recorded from the Executive Engineer ofthe Board under Section 133(b) of the Act, wherein he appearsto have stated, generation not started but work is over. Armedwith this statement, the assessing officer stated thatproduction of electricity as on 31.3.2005 was less than oneunit and at best could be treated as trial production and theassessee having not produced electricity before 31.03.2005,cannot be stated to have put the wind mill to use for thepurpose of business. It is not in dispute that thecertificate issued by the competent authority states thatelectricity was generated on 31.3.2005, however the amount ofelectricity which was generated was only 0.080 units. This,according to the assessing officer, is insufficient as it canbe considered only as a trial run, but actual generation ofelectricity took place much after 31.3.2005. The Tribunalconcurred with the findings of the Assessing Officer, but hadreferred to the aforementioned four decisions. In ourconsidered opinion, all the four decisions cannot be applied tothe facts of the present case. 6. In the case of “B.Malini and Co., -Vs- CIT (1995) 214ITR 192 (Bom), there was a gap of one clear previous yearbetween installation of machinery and its usage and hence itwas held that no depreciation can be claimed. In “The DeputyCIT -Vs- Yellamma Dasappa Hospital (2007 290 ITR 353 Kar), theCourt found that the machinery has not been actually put touse. In “Dineshkumar Gulabchand Agrawal -Vs- CIT (2004) 267ITR 768 (Bom), the assessee claimed depreciation upon themachinery being kept ready for use and not put to use. In “CIT-Vs- Maps Tours and Travels (2003 260 ITR 655 Mad), no evidencewas placed by the assessee before the Tribunal that the cars,which were purchased by them were used. Thus, we find thatall the four decisions are not applicable to the present caseand are on different set of facts and figures. 7. The case of the assessee before us strengthened in thelight of the following decisions. In “Principal CIT -Vs- Larsen& Toubro Ltd., 403 ITR 248 (Bom)” , the machinery for trialproduction was held to qualify for deduction as it would amountto using the machinery for the purpose of business.InCIT-Vs- Escorts Tractors Ltd 56 Taxmann.com 333(Delhi)”, theplant and machinery kept ready for use was held to be enough togrant depreciation. In “CIT -Vs- Southern PetrochemicalIndustries Corporation Ltd 311 ITR 202 (Mad)”, the claim fordepreciation on spare parts, which were stand-by items, washeld permissible. In “CIT -Vs- Geo Tech Construction 244 ITR452 (Kerala)”, it was held that an asset can be said to be inuse when it is kept ready for use. It is beneficial to refer toparagraph 5 of the said judgment, which reads as follows. “5.Section 32 of the Act deals with depreciation.There is no requirement that the assets should beused for the whole of the assessment year inquestion. The term used in Section 32(1) is "owned byassessee", but that does not bring in a requirementthat the assessee should have remained the owner ofthe asset in question for the entire previous year inquestion. The object of the Legislature, in grantingdepreciation allowance under Section 32 of the Act,is to give due allowance to the assessee for wear andtear suffered by the asset used by him in hisbusiness so that the net income (total income) isduly arrived at. There is no factual dispute that theassets in question were owned by the assessee. InMachinery Manufacturers Cororation Ltd. v. CIT[1957]31 ITR 203 (Bom), it was observed that the expression"used" in Section 10(2)(vi) of the Indian Income-taxAct, 1922 (hereinafter referred to as "the old Act")corresponding to Section 32 of the Act has to begiven a wider meaning. The expression includes passive as well as active user. In CIT v. DalmiaCement Ltd. [1945] 13 ITR 415 (Patna) and CIT v.Viswanath Bhaskar Sathe [1937] 5 ITR 621 (Bom), itwas observed that depreciation might be allowed incertain cases even though the machinery was not inuse or was kept idle. The question whether the word"used" would include both passive as well as activeuser was left open by the apex court in Liquidatorsof Pursa Ltd. v. CIT [1954] 25 ITR 265. The words"used for the purposes of the business" are capableof a larger and a narrower interpretation. If theexpression "used" is construed strictly, it can betaken as connoting or requiring the active employmentor the actual working of a machinery, plant orbuilding in the business. On the other hand, thewider meaning will include not only cases where themachinery, plant, etc., are actively employed butalso cases where there is, what may be described as apassive user of the same in the business. An assetcan be said to be in use when it is kept ready foruse. “ 8. In “CIT -Vs- Refrigeration & Allied Industries Ltd 323ITR 672”, the machineries were kept under good workingcondition so that it could be used at any moment, all expensesrelating to the said machinery (cold storage) were allowed tobe claimed as depreciation.In “CIT -Vs-Shahbad Co-op SugarMills Ltd 12 Taxmann.com 421 (Punjab & Haryana)”, themachinery which was kept ready for use was held to qualify fordepreciation under Section 32 of the Act. 9. The above decisions will clearly show that even trialproduction machineries kept ready for use etc., were consideredto be used for the purpose of business to qualify fordepreciation. In “CIT -Vs- Geo Tech Construction 244 ITR 452(Kerala)” , the machinery which was purchased by the assessfrom Pondicherry was yet to reach work site at Kochi and werein transit, and the Court held that it would amount to passiveuse and would qualify for depreciation. Thus, we are of theconsidered view that the Tribunal erred in reversing the orderpassed by the CIT (Appeals). For all the above reasons, thesubstantial question of law No.1 is answered in favour of theassessee. 10. With regard to substantial question of law No.2,Ms.Premalatha, learned Standing Counsel for the Revenue wouldsubmit that at the relevant point of time Section 32(1)(iia),as it stood then relevant to the assessment year 2005-06,generation of electricity was not forming part of the Statute.However, as rightly pointed out by Mr.Sriraman, learned counsel for the assessee, Section 32(1)(i) included generation orgeneration and distribution of power. The tribunal rejectedthe claim for additional depreciation on the ground that theassessee being not entitled for depreciation, the question ofclaiming additional depreciation does not arise. The CIT(Appeals) rejected the claim of additional depreciation byrelying upon an order passed by the Chennai Tribunal inI.T.A.Nos.307/Mds/2000 dated 06.09.2005. We are informed thatthe said decision has been reversed by this Court. In anyevent, there was no adjudication into the factual position asto whether the assessee, who is engaged in the business ofgeneration of power, was entitled for additional depreciation. 11. Ms.Premalatha, learned Standing Counsel contended thatthe line of business activity of the assessee was manufactureof safety matches and establishing a wind mill was a new lineof business. In fact, this cannot be a ground to non suit theassessee, as similar issue raised by the Revenue in “CIT -Vs-Hi Tech ARAI Ltd., (2010) 236 CTR 0321” , was rejected.Paragraph No.5 of the judgment reads as follows. 11. Ms.Premalatha, learned Standing Counsel contended thatthe line of business activity of the assessee was manufactureof safety matches and establishing a wind mill was a new lineof business. In fact, this cannot be a ground to non suit theassessee, as similar issue raised by the Revenue in “CIT -Vs-Hi Tech ARAI Ltd., (2010) 236 CTR 0321” , was rejected.Paragraph No.5 of the judgment reads as follows. “5. In the case on hand, the assessee is stated tohave set up two wind mills in addition to the alreadyexisting four wind mills and thereby increased itspower generation capacity by above 50%. It is truethat the assessee is a company engaged in the businessof manufacture of oil seeds, moulded rubber parts,reed value assemblies apart from generation of power.After the installation of the additional wind mills,both prior to as well as after the installation of theadditional wind mills, the assessee was using windenergy for generating power for its capitativeconsumption apart from selling the surplus powergenerated to the Tamil Nadu Electricity Board. As faras application of Section 32(1)(iia) of the Act, isconcerned, what is required to be satisfied in orderto claim the additional depreciation is that thesetting up of a new machinery or plant should havebeen acquired and installed after 31st March 2002 byan assessee, who was already engaged in the businessof manufacture or production of any article or thing.The said provision does not state that the setting upof a new machinery or plant, which was acquired andinstalled upto 31.03.2002 should have any operationalconnectivity to the article or thing that was alreadybeing manufactured by the assessee. Therefore, thecontention that the setting up of a wind mill hasnothing to do with the power industry, namely,manufacture of oil seeds etc. is totally not germaneto the specific provision contained in Section 32(1) (iia)of the Act. “ 12. Therefore, the said contention raised by Ms.Premalatha,learned Standing Counsel does not merit consideration. The nextaspect is whether generation of electricity would fall withinthe ambit of business of manufacture or production of anyarticle or not. This issue appears to be no longer res integraand decided in favour of the assessee in “CIT -Vs- NTPC (2019)103 Taxmann.com 398”. In the said case, the assessee was engagedin the production of thermal power and was held to be eligibleto claim additional depreciation under Section 32(1)(iia). TheCourt took into consideration the decision of the ConstitutionBench of the Honourable Supreme Court in “State of A.P. -Vs-NTPC AIR 2002 SC 1895”, wherein the Apex Court held electricityto be “goods” for the purpose of sales tax. Thus, by referringto the decision of the Constitution Bench, it was pointed outthat electricity is capable of abstraction, transmission,transfer, delivery, possession, consumption and use like anyother movable property. Following the same logic, to deny thebenefit of additional depreciation to generating entity on thebasis of electricity is not an “article” or “thing”, is anartificially restrictive meaning of the provision and thebenefit of additional depreciation under Section 32(1)(iia) hasto be granted to the assessee. This decision will fully apply tothe facts of the present case and consequently, it has to beheld that the assessee is entitled for additional depreciationas well. Accordingly, the substantial question of law No.2 isalso answered in favour of the assessee. 13. In result, the appeals are allowed and the substantialquestions of law are answered in favour of the assessee. Nocosts. Sd/-Assistant Registrar(CO) //True copy// KST Sub Assistant Registrar To 1. The Deputy Commissioner of Income Tax Circle I, Virudhunagar. 2. Income Tax Appellate Tribunal “B” Bench, Chennai. Chennai. 13. In result, the appeals are allowed and the substantialquestions of law are answered in favour of the assessee. Nocosts. Sd/-Assistant Registrar(CO) //True copy// KST Sub Assistant Registrar To 1. The Deputy Commissioner of Income Tax Circle I, Virudhunagar. 2. Income Tax Appellate Tribunal “B” Bench, Chennai. Chennai. 3. The Commissioner of Income Tax (Appeals)-II, Madras.4. The Assistant Commissioner of Income Tax, Circle I, Virudhunagar.+1cc to Mr.A.S.Sriraman, Advocate SR.No.58716+1cc to Ms.S.Premalatha, Advocate SR.No.59052 T.C.(A) Nos.655, 656 and 657 /2009PM(CO)GMY(19/08/2019)