Additional depreciation on new asset not subject to setting up or operational connectivity with main business

This article summarizes recent ruling of the Madras High Court (HC) in the case of CIT v M/s Hi Tech Arai Limited (Taxpayer) [Tax Case (Appeal) Nos. 670 and 671 of 2009] on the issue of allowability of additional depreciation on newly set-up windmills, under the Indian Tax Law (ITL), where the setting up of windmills had no connection with the main business activity of the Taxpayer. The HC held that, for the purpose of claiming additional depreciation under the ITL, it is not required for the setting up of new machinery or plant to have any operational connectivity with the main business of the Taxpayer.

Background and facts

• The Taxpayer is engaged in the business of manufacture of oil seeds, moulded rubber parts etc., apart from power generation.

• The Taxpayer had set up 2 windmills in addition to the existing 4 windmills, thereby increasing the power generation capacity more than 50%.

• The power generated from the wind energy was used for self-consumption and the surplus was sold to the State Electricity Board.

• The ITL provides for the allowability of additional depreciation, when a new undertaking is set up or there is a substantial expansion of an existing undertaking by a taxpayer which is engaged inthe business of manufacture or production of any article or thing.

• For the relevant assessment years, the Taxpayer claimed additional depreciation on setting up of windmills which was disallowed by the Tax Authority, on the ground that the main business of the Taxpayer was not power generation.

• The first and second appellate authorities allowed the claim of additional depreciation made by the Taxpayer. Aggrieved by this, the Tax Authority preferred an appeal before the HC.

Issue for consideration:-Whether the setting up of new machinery or plant, which is not used in the main business of the Taxpayer, is eligible for additional depreciation under the ITL.

Contentions of the Tax Authority :- The setting up of the windmill has absolutely no connection with the Taxpayer’s main business of manufacture of oil seeds etc.

Ruling of the HC

• For the purpose of claiming additional depreciation under the ITL, the condition to be satisfied by a taxpayer already engaged in the business of manufacture or production of any article or thing, is to set up a new machinery or plant.

• The setting up of a windmill will fall within the expression ’setting up of new machinery or plant’.

• The new machinery or plant need not have any operational connectivity to the article or thing that was being manufactured by the Taxpayer.

• It was held that the Taxpayer was entitled to the claim of additional depreciation on setting up of the windmill.

Comments :-The HC has taken a liberal view in the matter of grant of additional depreciation.