depreciation in case of electricity company

The issue as to whether the generation of power amounts to production of an article or goods was examined by Supreme Court in the following judgments :–. ), Dy. 6,37,45,348. The assessment was completed under section 143(3) of the Act on 28-3-2014 determining the total loss at Rs. Maintained by V2Technosys.com, Appeal Number : IT Appeal No. This matter was further carried by the revenue to the Hon’ble Calcutta High Court which was dismissed by the Hon’ble Calcutta High Court in the case of CIT v. Ankit Metal & Power Ltd. (2015) 972 ITR 660 (Cal.). Electricity Board AIR 1970 SC 732. The calculations of the extra depreciation for double shift working and for triple shift working shall be made separately in the proportion which the number of days for which the concern worked double shift or triple shift, as the case may be, bears to the normal number of working days during the year. CIT v. Hutti Gold Mines Co. Ltd. (2013) 60 SOT 147 (Bang.-Trib.). 517 (Kol.) Often overlooked is the significance of the depreciation expense, the effect it can have on the rate base, and, therefore, the overall return on the utility’s investment. 227,00,22,060 after making dis allowance under section 14A of the Act in the sum of Rs. “1. in books of accounts-reg, Gujarat HC rejects TAR/ITR due date date extension writ applications. In case of an electricity company, depreciation on assets is calculated based on the rates notified by (A) Companies Act 2013 (B) State Electricity Commission (C) Central Electricity Regulatory Commission (D) Income Tax Act 1961 40. Includes a company 3 production lines a, b, c and the following is a list of income per production line statement, Sales -V.C LA 125000 50000 (30000) 20000 75000 (50000) 75000 (25000) 50000 C.M Fixed cost (29500) (1000) (500) (1000) (10000) (2000) (15000) (59000) 16000 Salaries (12500) (7500) (500) (2000) (6000) (500) (9000) (38000) 12000 (8000) (5500) (1000) (3000) (4000) … 1. 2(1)(ii). 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. : Proceedings under section 263 of the Income Tax Act, 1961 in the case of M/s. 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. 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. 3(ii)] MINISTRY OF POWER. Copyright © TaxGuru. For that on the facts and in the circumstances of the case, the CIT’s order under section 263 dated 29-10-2015 being legally and factually unsustainable the same be cancelled and the assessing officer’s order under section 143(3) dated 28-3-2014 allowing the deduction for additional depreciation under section 32(1)(iia) be restored.”. 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CASE STUDY India’s Accelerated Depreciation Policy for Wind Energy April 2015 Tushar Sud, Rajneesh Sharma, Radhika Sharma (Deloitte Touche ... hour [kWh]) per unit of electricity fed into the grid over and above the state-fixed tariff for a period of no less than four years and a maximum period of 10 years. 5603, Advance ruling cannot be given on Services to others by 3rd Parties, No decision on AAR Application if Applicants not submit documents, Fried Fryums classifiable under HSN 21069099- Attracts 18% GST, ‘AAYUDH-MOSX’, is a mosquito repellent & Attracts 18% GST, CFSS-2020 Form shall be available for filing w.e.f 16.01.2021, GST on Zinc /Iron Ethylenediamine Tetra Acetic Acid, Un-fried FRYUMS classifiable under Tariff Item 2106 90 99, Join Detailed Online Certification Courses on GST, All India Protest Call against GST/Income Tax Issues by WMTPA, Further extend Income Tax Return & Audit due dates, ICAI request for further extension of TAR/ITR due dates, Extend due dates of GST, Income Tax & ROC Compliances, Due dates for filing of Form GSTR-3B for December, 2020, CBDT issues Corrigendum to Order on due date extension, Extend CFSS 2020 & LLP Settlement Scheme to 31.03.2021. In addition, this exceptional depreciation cannot exceed €15 million per company and per investment project. It is undisputed that no opportunity was afforded to the assessee in the instant case before us by the learned CIT to address on the aspect of ‘lack of inquiry’ on the allow ability of claim of additional depreciation. You are therefore given an opportunity to make your submission personally or through your duly Authorized representative on 13-8-2015 at 11:30 A.M. before me at my chamber. According to Section 32AD, a new deduction of 15% on new plant and machinery in the year of installation and not in the year of purchase. 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. Depreciation effectively turns the cost of the asset into a company expense. 6.1. ( In the case, the real estate is owned by company, it can reduce the amount of corporate tax = Hojin zei. The Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 248 ITR 83 (SC) at page 88 held as follows :–, ‘The phrase “prejudicial to the interest of the Revenue” has to be read in conjunction with an erroneous order passed by the assessing officer. Income Tax Depreciation is used in India to write off an asset used for business purpose over its life time and charge it to … Sir In Case Of Addition for FY 2019-20 It is Taking Wrong Rate of Depreciation For SLM. The energy so produced in law constituted “goods”. 6.4. to produce energy/electricity. MACRS Solar Depreciation: 6,37,45,348 which, in his opinion, could be granted only with effect from assessment year 2013-14 as the assessee … State of AP v. National Thermal Power Corpn. Hence there was no iota of doubt in the mind of the learned assessing officer to adjudicate this specific issue in the assessment year under appeal from a different perspective. If the company depreciates the asset over the 12 ... electricity, rates of depreciation prevail over the Schedule XIV to the Companies Act. This matter was further carried by the revenue to the Hon’ble Calcutta High Court which was dismissed by the Hon’ble Calcutta High Court in the case of CIT v. Ankit Metal & Power Ltd. (2015) 972 ITR 660 (Cal.). If asset is put to use for less than 180 days then amount equal to 50% of the amount calculated using normal depreciating rates is allowed as depreciation. Residential solar is significant with respect to solar depreciation because of relatively zero transmission losses, as it provides you with the best utilization of your land resources (in this case it’s your rooftop). A basic principle to ratemaking is to only charge customers for assets that are used to provide them service. 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. 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. In the present case the assessee during the relevant year was engaged in the business of generation and distribution of power. 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. As a result, depreciation and amortization are not usually included in the calculation of gross profit. In order to address the “prediction problem,” a commonly accepted solution is the use of the mortality curves that apply to utility plant. 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. 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. 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. Contact us below for help determining whether a depreciation study would be useful for your utility. FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-. 72A. It is pertinent to note that the assessee had not been given any opportunity by the learned CIT to address his changed track. S.O. 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. 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. Even otherwise, from the aforesaid judicial decisions which are in the public domain, it would be wrong on the part of the learned CIT to assume that the learned assessing officer had not made any inquiry or applied his mind on the aspect of additional depreciation. James Keen has over 15 years experience as an engineering analyst and in complex regulatory proceedings, which includes electric, natural gas, oil and gas pipeline, water and wastewater, and refuse utilities. ) What is depreciation cost. This view was again reiterated by the Supreme Court in the case of National Thermal Power Corpn. Aldrich works collaboratively with utility management and staff to prepare and present a study before utility boards and commissions charged with reviewing and approving depreciation rates. Every electricity company is required to maintain a contingencies reserve. Join our newsletter to stay updated on Taxation and Corporate Law. As a company is required to identify only material/significant components separately for the purpose of charging depreciation, materiality is a matter of judgement that need to be decided on the facts of each case. 2. This claim for depreciation is generally referred to as capital allowances. 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. The Tribunal noted that the power was generated by deploying huge plants and therefore it may be said that there was transformation of one source of energy into another. The revenue requirement formula is the basis of the utility rates we pay to charge our smart phone, heat our home, cook our dinner, and water our lawn. The Tribunal accordingly held that the benefit of additional depreciation under section 32(1)(iia) could not be denied to the assessee. 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. In view of the aforesaid findings and in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon on the impugned issue, we have no hesitation in quashing the order passed by the learned CIT under section 263 of the Act and allow the grounds raised by the assessee. In certain types of analysis, they also provide graphical tools, such as those shown below, to compare the utility’s asset experience with potential mortality curves so the best life projection can be chosen. 7. This formula is unknown to the average utility customer, yet utility executives, wonks, and regulators know it by heart. However, with regard to the issue of allowing additional depreciation under section 32(1)(iia) the Tribunal found that the assessment order did not suffer from any infirmity. Depreciation is a fixed cost, because it recurs in the same amount per period throughout the useful life of an asset.Depreciation cannot be considered a variable cost, since it does not vary with activity volume.However, there is an exception. 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. For that on the facts and in the circumstances of the case, the CIT was unjustified in passing the revision order under section 263 on the alleged ground that the assessing officer did not make any inquiry into the aspect of allow ability of additional depreciation even though in the show cause notice issued; no such ground was assigned for considering the order of assessment to be erroneous and in that view of the matter the CIT’s order setting aside the assessment for lack of inquiry was unsustainable and deserves to be set aside. 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. In a business venture, the major determinant of whether there will be continuity or discontinuity is cost. Therefore, the determination of how quickly to recover the investment through depreciation will greatly impact ratepayers and the utility. 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. Aggrieved, the assessee is in appeal before us on the following grounds :–. The guidance note gives indicators to assess significant components: • Determine the threshold value to If the asset is used for more than a period of 180 days, then the additional depreciation permissible is 17.5%. It cannot be swept under the carpet that there was no debate in the case of the assessee with regard to the claim of additional depreciation in the earlier years as the same had been consistently been claimed and allowed by the learned assessing officer in the scrutiny assessment proceedings. 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 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. 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. 2. 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. 28%) multiplied by the tax rates mentioned above (20% to 125%). On perusal of the assessment record vis-a-vis the return and other document submitted it is seen that the assessee company had claimed additional depreciation @ 20% on additions made to plant and machinery at Thermal Power Station and Hydel Power Station. 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. Room No. 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. Besides the said reason; revision order was also passed on other issue of inclusion of additional power tariff. He focuses on revenue requirement, cost of service and depreciation studies as well as tariff filings, certificate issues and other financial analyses and regulatory…, Are you a benefits recipient or looking for help with your client account? Different Methods of determining depreciation: Now we are going to discuss methods of determining depreciation and before that let us know what actually depreciation is.It is due to constant use of power plant equipment and building for many years there is a decrease in value of power plant.This is called depreciation of power plant. The assessment order passed under section 143(3) dated 28-3-2014 is erroneous and prejudicial to the interest of Revenue on this point for the reasons discussed above. 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. (supra). The purpose of the depreciation expense is to recover the utility’s plant investment incrementally throughout the service life of the asset. The focus of this article is on the plant content within buildings in particular. (A) 10% (B) 15% (C) 20% (D) 25% 39. In our next article, we will discuss how you can prepare for the best depreciation study possible. Hence it is undisputed that transformation from mere coal to electricity and from mere water to electricity happens pursuant to the manufacturing process and the electricity so produced or generated becomes a separate marketable commodity. 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. Assumed that you purchase a scissor of 100 yen. To look forward, we must first look back at the realized utility experience in the continuing property records and use that data. In the result, the appeal of the assessee is allowed. 6.3. 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. i.e Asset put to use on or before 3rd oct of the year (4th oct in case of leap year) then 100% depreciation is allowed, otherwise 50%. In the case of Agarwal Transformers P.Ltd the Tribunal allowed higher depreciation @ 30% on the reasoning that generator is a renewable energy device. 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. The legislature in its wisdom thought it fit to bring in a specific amendment with effect from assessment year 2013-14 in order to confer the benefit of additional depreciation under section 32(1)(iia) of the Act for the assessees engaged in the business of generation and distribution of power and the same cannot be held to be retrospective in operation. 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. Only solar electricity technology can give clean point-of-use power. Accordingly the ITAT reversed the CIT’s order under section 263 on this ground. We have heard the rival submissions and perused the materials available on record. Just in case, I will explain about meaning of depreciation cost. CIT (2012) 54 SOT 177. 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. An excessive depreciation expense will result in higher rates, increased cash flow for the utility, and a reduction in the utility’s return on investment as the rate base is depleted. Being aggrieved by the CIT’s order under section 263 the matter was carried before the ITAT. Moreover, the learned assessing officer had the benefit of the jurisdictional tribunal decision before him in the case of Ankit Metal and Power Ltd. (supra) before him before passing the assessment order for the assessment year 2011-12 under section 143(3) dated 28-3-2014. But the same could be done only after affording opportunity of being heard to the assessee to address on the new issue taken up by the learned CIT. Essentially, today’s customers should pay for today’s plant, not tomorrow’s or yesterday’s plant. 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. Estimating a precise service life and final salvage value of an asset, sometimes forty or more years in the future, verges on impossible. In CIT’s opinion the assessee’s business of generation of power could not be equated with the connotation of “production of an article or thing”. 5. It is clear thus that additional depreciation in respect of business of generation or generation and distribution of power is only applicable with effect from assessment year 2013-14 and subsequent years but not during the assessment year 2011-12. (4) „Auditor‟ means an auditor appointed by a generating company or a transmission licensee, as the case may be, in accordance with the provisions of sections 224, 233B and 619 of the Companies Act, 1956 (1 of 1956)], as amended from time to time or Chapter X of the Companies Act, 2013 (18 of 2013) or any other law for the time 3. THE GAZETTE OF INDIA EXTRAORDINARY [PART II-SEC. CIT (ITAT Kolkata). For that on the facts and in the circumstances of the case, various judicial forums like High Court & ITAT having held that assessees engaged in generation of power were eligible for additional depreciation under section 32(1)(iia) and these decisions being available in public domain prior to passing of the order under section 143(3) for assessment year 2011-12; the CIT was grossly unjustified in holding the assessment order under section 143(3) to be erroneous on the ground that additional depreciation was allowed by the assessing officer. So on this logic, the Income-tax Officer can not deny an assessee from claiming additional depreciation for generating electricity. 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. Empirically-based curves, such as the Iowa curves, were originally developed in the 1930s and improved over the years. The wrongful act on the part of the assessing officer on the point discussed above has made the assessment order erroneous and prejudicial to the interest of Revenue. If the correct curve and average service life is chosen for a specific type of utility asset (e.g. 4.3. 13–6 Company policy should provide for a plant ledger, identification tags on all plant assets, and a system of retirement work orders. According to CIT the electricity generated did not have any tangible existence nor it was having physical properties or mass and therefore the same could not be considered to be an article or thing and, therefore, the assessee could not be considered to be engaged in the business of production of an article or thing and hence not eligible for deduction under section 32(1)(iia). Damodar Valley Corporation passed under section 143(3) dated 28-3-2014 for the assessment year 2011-12. 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.’. It was contended that in the aforesaid decisions, the asst year involved was prior to assessment year 2013-14. (-) 2,27,00,22,060 (loss). On bare perusal of the said section it would be noted that an “eligible assessee” under section 32(1)(iia) is the one who “manufactures or produces any article or thing”. Pr.CIT-3/under section 263/2015-16/8515-17, date 29-10-2015/30-10-2015. of 2015, Taxguru Consultancy & Online Publication LLP, 509, Swapna Siddhi, Akurli Road, Near Railway Station, Kandivali (East), Additional depreciation allowable to Company in Generation and distribution of electricity even prior to 1-4-2013, Deduction under Section 33ABA – Site Restoration Fund, Section 33AB Tea, Coffee & Rubber Development Account, Physical verification report in Form GST REG-30, Application for enrollment of existing taxpayer in Form GST REG-26, Penalty u/s 271AAD for false entry etc. https://efinancemanagement.com/financial-accounting/depreciation It was also submitted that the show cause notice seeking to revise the assessment under section 263 of the Act was issued on the ground that the assessee is not engaged in the business of manufacture or production of any article or thing and hence not eligible to claim additional depreciation prior to assessment year 2013-14. The Tribunal further held that the process of power generation was akin to manufacture or production of an article or thing. 7. The various decisions supra relied upon by the assessee before the learned CIT were very much in the public domain (except the Hon’ble Calcutta High Court decision dated 20-11-2014 in the case of Ankit Metal and Power Ltd.) as they were reported judgments and the learned assessing officer following the same while framing the assessment under section 143(3) of the Act for the assessment year 2011-12, cannot be termed as erroneous in terms of section 263 of the Act. Claiming additional depreciation below for help determining whether a depreciation study possible and forces... Help on how to solve it or provide the updated utility prepared to and... A reliable computer model is imperative for the purpose of manufacture, an element transformation! As the Iowa curves, were originally developed in the business of generation of power annual.! 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C ) 20 % ( D ) 25 % 39 speak with one of our advisors is in appeal us! This formula is unknown to the tune of Rs for Useful life of 5 years it should depreciation... Was also taken by the Apex Court that the generation of power was! Accordingly the ITAT order is as FOLLOWS: - TTJ 77 ( Pune ) Trib! Formula is unknown to the income tax Act, 1961 in the calculation gross! To manufacture or production of “ goods ” to ratemaking is to only charge customers for assets that used. New marketable commodity after the manufacturing process exceptional depreciation can not exceed €15 million per company per.

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