Rajasthan High Court Upholds Hindustan Zinc's ₹18.87 Crore Additional Depreciation Claim On Power Plant Machinery

The Rajasthan High Court has upheld Hindustan Zinc Ltd.'s claim for additional depreciation of ₹18.87 crore on new plant and machinery installed at its captive power plant and wind power plant.

The court held that electricity generation falls within the scope of “production”, which has a wider connotation than “manufacture”.

It also held that an assessee engaged in manufacturing or producing an article or thing can claim additional depreciation on qualifying power-generation machinery, regardless of whether electricity generation itself amounts to production of an article or thing.

A Division Bench comprising Chief Justice Sanjay K. Agrawal and Justice Vinit Kumar Mathur dismissed the Revenue's appeal against the Income Tax Appellate Tribunal's decision. The Tribunal had set aside the Commissioner of Income Tax's order revising the assessment under Section 263 of the Income Tax Act.

The dispute arose after the Assessing Officer allowed Hindustan Zinc's claim for additional depreciation of ₹18,87,27,973 on new plant and machinery installed at its captive power plant at Chanderia and its wind power plant for Assessment Year 2007–08.

The Commissioner of Income Tax subsequently revised the assessment under Section 263 of the Act, holding that electricity generation did not amount to the manufacture or production of an article or thing. He concluded that the company was not eligible for the deduction.

The Tribunal set aside the Commissioner's order, holding that electricity generation amounts to the production of an article or thing. It also held that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The Revenue challenged the Tribunal's decision before the High Court.

The High Court observed that Section 32(1)(iia) allows additional depreciation on new machinery or plant acquired and installed after March 31, 2005, where the assessee is engaged in the business of manufacturing or producing an article or thing.

It noted that the acquisition and installation of new plant and machinery after the prescribed cut-off date was undisputed in the present case.

Referring to the Supreme Court's decision in State of Andhra Pradesh v. National Thermal Power Corporation Ltd., the Court noted that electricity is movable property capable of being transmitted, transferred and delivered.

The Court further observed, “Further, generation of power and electricity would come under the purview of 'production' as the word 'production' has a wider connotation than the word 'manufacture', as held by the ITAT in the impugned order while relying upon the decisions rendered in the case of Sesa Goa Ltd. (supra), Mysore Minerals Ltd. (supra) and Arihant Tiles and Marbles P. Ltd. (supra)'”

The Court also noted that Hindustan Zinc manufactures and produces minerals such as zinc and lead. The electricity generated at its captive and wind power plants is used in its manufacturing units to produce finished products.

It held, “It is a settled law that once an assessee acquires and installs new plant and machinery for generation of power after the cut-off date and is in the business of manufacture and production of an article or thing, the assessee is entitled to claim additional depreciation under Section 32(1)(iia) of the Act of 1961, regardless of the fact whether generation of power amounts to production of an article or thing”

On the Commissioner's power to revise an assessment under Section 263, the High Court reiterated that the assessment order must be both erroneous and prejudicial to the interests of the Revenue for the provision to apply.

Relying on the Supreme Court's decision in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, the Court noted that a loss of revenue alone does not justify revision where the Assessing Officer has adopted a view permissible in law. Where two views are possible, adopting one of them does not make the assessment order erroneous and prejudicial to the Revenue merely because the Commissioner disagrees, unless the view taken is unsustainable in law.

Finding that the Tribunal had correctly held that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue, the High Court answered both substantial questions of law against the Revenue and dismissed its appeal.

For Revenue: K.K. Bissa, Advocate 

For Hindustan Zinc Ltd: Senior Advocate Ajay Kumar Vohra, assisted by Anjay Kothari, Rohit Jain, Ram Krisan Rao and Amit Sharma