Citation Codes

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citation codes

Case Number

ITA 5850/DEL/2018

Attorney(S)

Acts

FINANCE ACT 2005
u/s 143(3) of the Income Tax Act (hereinafter referred to as 'the Act') by ACIT, Circle 8(1), New Delhi (hereinafter referred
Finance Act, 2005 has amended section 32
provisions of section 32(iia) of the Income-tax Act.
Income Tax Act of 20% of 3 Efaces Switchgear India

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Smart Summary

Judgment Summary: ITA No. 5850/Del./2018 (Assessment Year: 2012-13)

Factual and Procedural Background

This appeal arises from an income-tax assessment for AY 2012-13. The assessee, Efacec Switchgear India Pvt. Ltd. (formerly Efacec C&S MV Components Pvt. Ltd.), claimed additional depreciation of Rs. 6,11,277 on plant and machinery (specifically tools, dies and jigs) with an asset cost of Rs. 61,12,773 under section 32(1)(iia) of the Income-tax Act.

The Assessing Officer disallowed the claim for additional depreciation, treating the additions as tools that were not equivalent to new plant and machinery for the purpose of additional depreciation. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who dismissed the appeal and upheld the Assessing Officer's disallowance. The assessee further appealed to the Income Tax Appellate Tribunal (ITAT), Delhi Bench 'B'. The hearing took place on 19.04.2022 and the order was pronounced on 26.04.2022 by a bench comprising R.K. Panda (Accountant Member) and Anubhav Sharma (Judicial Member).

Legal Issues Presented

Whether additional depreciation under section 32(1)(iia) of the Income-tax Act is allowable in respect of newly acquired tools, dies and jigs (amounting to Rs. 61,12,773) used in the assessee's manufacturing activity.
Whether tools, dies and jigs acquired for use in an existing manufacturing plant qualify as "plant and machinery" for the purpose of additional depreciation, or whether such items are to be treated as mere replacements/improvements not eligible for additional depreciation.

Arguments of the Parties

Appellant's Arguments

The assessee contended compliance with the provisions of section 32(1)(iia) and claimed that the tools, dies and jigs purchased and installed during the year were new plant and machinery, entitling them to additional depreciation of 20% (or 10% where used for less than 180 days).
It was argued that the tools are ready to be used and do not require installation before use; therefore the Assessing Officer's finding that tools were not installed was incorrect.
The assessment order itself had treated the items as "plant and machinery" for the purpose of normal depreciation (15%), creating an inconsistent position if the items were denied additional depreciation.
The assessee relied on case law, including Scientific Engineering House (P) Ltd. v. CIT (1986) 157 ITR, Niko Resources Ltd. v. ACIT [2017] 88 taxmann.com 691 (Gujarat) and Bajaj Tempo Ltd. v. CIT, 62 Taxman 480 (SC), to support that tools/dies/jigs can qualify as plant.
The assessee also pointed to subsequent assessment years (AY 2014-15, 2015-16 and 2016-17) where additional depreciation on similar items had been allowed by the CIT(A).

Respondent's Arguments

The Departmental Representative (ld. DR) submitted that the Assessing Officer and the CIT(A) had passed reasoned orders and he stood by those orders (i.e., supporting disallowance of additional depreciation by lower authorities).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Scientific Engineering House (P) Ltd. v. CIT, (1986) 157 ITR	Applied and relied upon for the "functional test" to determine whether an article is to be characterised as plant in trade or business.	The bench relied on this decision and its functional approach to conclude that tools, dies and moulds can constitute part of plant and machinery when they perform the function of a plant in the manufacturing activity.
IRC v. Barclay, Curie & Co. Ltd., [1970] 76 ITR 62 (House of Lords)	Formulation of the "functional test": evaluate whether an article fulfils the function of a plant in the assessee's trading activity; whether it is a tool of the trade.	The Supreme Court's reliance on this House of Lords decision (as noted in Scientific Engineering House) supplied the functional test invoked by the Tribunal in analysing whether the tools are plant.
Niko Resources Ltd. v. Assistant Commissioner of Income-tax, [2017] 88 taxmann.com 691 (Gujarat)	Cited by the assessee in support of the proposition that certain items may qualify as plant.	Cited by the assessee; the present ITAT order records the citation but does not set out any detailed application of this decision in the reasoning beyond noting the reliance.
Bajaj Tempo Ltd. v. Commissioner of Income Tax, 62 Taxman 480 (SC)	Cited by the assessee in support of the claim that tools/moulds can be plant for tax purposes.	Cited by the assessee; the Tribunal record notes the citation but does not elaborate any direct doctrinal application of this case in the reasoning beyond acknowledging the reliance.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded as follows:

The Tribunal noted the functional test endorsed by the Supreme Court in Scientific Engineering House (P) Ltd., which in turn relied on the House of Lords decision in IRC v. Barclay, Curie & Co. Ltd. That functional test asks whether an article performs the function of a plant in the assessee's trading activity — in short, whether it is a tool of the trade.
Applying that test, the bench observed that the tools, dies and jigs were used by the assessee in its manufacturing of switchgear products and are necessary for the production of the product to required specifications. The items are not independent of the plant and machinery but are parts of the machinery.
The Tribunal reasoned that when such moulds, dies and tools wear out, the machines cannot produce products to business specifications without replacing those tools; this functional interdependence supports treating them as part of plant and machinery.
The Tribunal also noted the inconsistency in the assessment process where the assessment order had allowed normal depreciation on those items treating them as plant & machinery, yet denied additional depreciation on the same basis — though the Tribunal's primary basis for decision was the functional test rather than procedural inconsistency.
Finally, the Tribunal noted that in the assessee's subsequent assessment years, the revenue had allowed additional depreciation on similar tools. That practice in subsequent years was recorded and factored into the Tribunal's conclusion permitting the claim for the year under appeal.

Holding and Implications

Holding: APPEAL ALLOWED. The Tribunal allowed the assessee's claim for additional depreciation in respect of the tools, dies and jigs (Rs. 6,11,277) for AY 2012-13.

Implications:

Direct effect on the parties: The disallowance made by the Assessing Officer (and upheld by the CIT(A)) was set aside and the assessee's claim for additional depreciation was allowed by the Tribunal.
Scope of decision: The Tribunal's reasoning rests on the application of the established "functional test" (as articulated in Scientific Engineering House and IRC v. Barclay) to conclude that the items in question formed part of plant and machinery for the purpose of additional depreciation under section 32(1)(iia).
Broader precedent: The opinion does not state that a new legal precedent is being established beyond its application of the existing functional test; it resolves the factual and legal question for the appeal at hand and records that similar claims were allowed in later assessment years by the revenue.

Order pronounced in open court on 26 April 2022. Members: R.K. Panda (Accountant Member) and Anubhav Sharma (Judicial Member).

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EFACEC SWITCHGEAR INDIA PVT. LTD. (Now merged with Efacec India Pvt. Ltd.), New Delhi v. ACIT, CIRCLE- 8(1), NEW DELHI

1 ITA No. 5850/Del./2018 Efaces Switchgear India Pvt. Ltd. IN THE INCOME TAX APPELLATE TRIBUNAL DELHI (DELHI BENCH 'B' : NEW DELHI)

BEFORE SH. R.K.PANDA, ACCOUNTANT MEMBER

AND

SH. ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.5850/Del/2018 (Assessment Year : 2012-13)

Efacec Switchgear India P. Ltd. (Earlier known as Efacec C&S MV Components Pvt. Ltd. & now merged with Efacec India Pvt. Ltd.) th 4 Floor, Rectangle-I, Commercial Complex, D-4 Distt. Centre, Saket, New Delhi-110017 PAN – AACCE4200H	Vs.	ACIT, Circle 8(1), C.R.Building, I.P.Estate, New Delhi -110002
(APPELLANT)		(RESPONDENT)
Assessee by	Sh. Yogesh Jain, CA and Sh. Sahil Bhalla, CA
Revenue by	Sh. Atiq Ahmad, Sr. DR
Date of hearing:	19.04.2022
Date of Pronouncement:	26 .04.2022

ORDER

PER ANUBHAV SHARMA, JM: The appeal has been filed by the assessee against order dated 31.05.2018 in appeal no. 119/16-17 passed by the Commissioner of Income Tax (Appeals)- 34, New Delhi (hereinafter referred to as the Ld. First Appellate Authority or in

Efaces Switchgear India Pvt. Ltd. short Ld. FAA) in appeal before it against order dated 29.02.2016 passed u/s 143(3) of the Income Tax Act (hereinafter referred to as 'the Act') by ACIT,

Circle 8(1), New Delhi (hereinafter referred to as the ld. Assessing officer or in short 'Ld. AO').

2. The assessee has raised following ground of appeal :-

"The learned CIT(A) erred on facts and in law in disallowing expenses on account of additional depreciation of Rs. 6,11,277." 3. The facts in brief are that during the relevant AY appellant has claimed additional depreciation of Rs. 6,11,277/- on addition of new plant and machinery of Rs. 61,12,773/- as under :-

Particular	Addition more than 180 days	Addition less than 180 days	Additional depreciation
Tools	Nil	61,12,773	6,11,277
Total	Nil	61,12,773	6,11,277

The appellant has claimed additional depreciation on new plant & machinery

purchased and installed during the year as per the provisions of section 32(iia)

of the Income-tax Act. The appellant had submitted that it is complying with all

the provisions of section 32(iia) and therefore, is entitled to additional

depreciation.

3.1 However, the Ld. AO at page 5 of the assessment order has held as under :

" The intention of the section is to give incentive to the new entrepreneurs to set up new manufacturing establishments. The language of the section 'In the case of any new machinery or st plant which has been acquired and installed after the 31 day of march, 2005" intends set up of new plant and not moulds and dies addition / renovation or repair to the old plant. Further, the assessee has made addition of tools which cannot be treated as installation of plant and machinery".

Efaces Switchgear India Pvt. Ltd. 3.2 The assessee went in appeal before CIT(A) raising grounds that certain amendments were made regarding additional depreciation by Finance Act,

2005. Kind attention is invited to para 3.6 of the explanatory notes on the

provisions of the Finance Act, 2005- Circular No. 3/2006 dated 27.02.2006

which states as under:

"in order to encourage investment the Finance Act, 2005 has

amended section 32 to increase the rate of additional depreciation to twenty per cent on new machinery and plant other than ships and aircraft, acquired and installed after the st 31 day of March, 2005 and dispensed with the condition of additional depreciation to be allowed to a new industrial undertaking and the condition of expansion in installed capacity". It claimed that circular makes it is clear that additional depreciation is to be allowed on new plant and machinery acquired and installed after 31^st day of March, 2005. There is no requirement that additional depreciation is to be allowed to a new industrial undertaking or there should be expansion of installed capacity.

3.2.1 It was submitted that the Ld. AO has not disputed the fact that plant & machinery were new. Hence, the appellant fulfils the condition laid down u/s 32

(1) (iia).

3.2.2 As with regard to the findings of the Ld. AO that tools have not been used it was submitted that the tools are ready to be used and does not require installation before being used.

4. Ld. FAA dismissed the appeal with observtion that "I have considered the submissions of the appellant's AR. In case of any new machinery or plant (excluding ships and aircraft) acquired and installed after March 31, 2005 by an assessee who is engaged in the business of manufacture or production of any article or thing - additional depreciation under Income Tax Act of 20% of

Efaces Switchgear India Pvt. Ltd. actual cost shall be allowed. Further, from A.Y. 2013-14 the same is also allowed to assessee engaged in the business of generation or generation and distribution of power, where the depreciation is provided on WDV method as

per Appendix I. Further, from assessment year 2017-18 the same is also

allowed to the assessee engaged in the business of transmission of power.

Further, where the asset is used for less than 180 days then 50% depreciation i.e, 1/2 of 20% (i.e.10%) is available (Balance 50% of Additional Depreciation can be claimed in next year) Further, no such additional deduction will be

allowed in respect of machinery or plant—

1. Used by any other person in India or outside India before its installation.

2. Installed in any office premises or any residential accommodation,

3. including a guest house.

4. Any office appliances or road transport vehicles.

5. The whole of actual cost of which is allowed as a deduction in computing income for tax purposes in any one previous year.

In view of the provisions of section 32(iia) as well as the explanatory notes on the provisions of the Finance Act, 2005- Circular No. 3/2006 dated 27.02.2006, it is evident that additional depreciation is to be allowed only on new plant and machinery acquired and installed after 31^st day of March, 2005. There is no requirement that additional depreciation is to be allowed to a new industrial undertaking or there should be expansion of installed capacity, as interpreted by AO. Therefore, the findings of AO to that extent are incorrect. Similarly, AO has also interpreted that tools have not been installed. This interpretation of AO is also incorrect since in order to use the tools, it is not necessary to install them. The tools are ready to use and does not require any specific installation before being used. The appellant has claimed additional depreciation on addition of tools under the head "fixed assets" and therefore placed under the block "plant and machinery". Such tools of fixed assets, acquired during the year, amounting to

Efaces Switchgear India Pvt. Ltd. Rs. 61,12,773/-, has been treated by the appellant as new plant and machinery, on which additional depreciation has been claimed.

However, I am unable to accept the contention of the appellant's AR. The

acquisition of new tools, can, by no stretch of imagination be held as

equivalent to acquisition of new plant and machinery. The tools are acquired

so as to enhance the life of an existing plant and machinery. Whenever a new

plant and machinery is acquired, any tools which are integral and

inseparable part of such new plant and machinery are certainly eligible for

additional depreciation. However, acquisition of tools for an existing plant

and machinery do not qualify for additional depreciation. Accordingly, the

claim of additional depreciation made by the appellant is held as an incorrect

claim and accordingly the disallowance of additional depreciation, made by

the AO is upheld." 5. Heard and perused the record.

5.1 On behalf of the assessee it was submitted that since tools, dies, jigs etc. are used by the appellant for its business of manufacturing switchgear products, the same are plant & machinery. Without these equipments it is not possible for appellant to manufacture switchgear products. Hence, the same are in the nature of 'Plant & Machinery. It was submitted that in the assessment order also tools, dies, jigs etc. have been treated as Plant & Machinery and 15% depreciation on the same has been allowed. However, the same have not been treated as Plant & Machinery only for the purpose of additional depreciation. Therefore, the stand taken in the assessment order is contradictory in itself, in-as-much-as, as on the one hand the new plant & machinery and tools, dies, jigs etc. have been considered as 'Plant & Machinery' and normal depreciation @ 15% has been allowed on the other hand the same have not been considered as eligible for additional depreciation. In support of the contention reliance was placed on the decision of Hon'ble Supreme Court in the case of Scientific Engineering House (P) Ltd. v. CIT, (1986) 157 ITR and further in Niko Resources Ltd. v.

Efaces Switchgear India Pvt. Ltd. Assistant Commissioner of Income-tax [2017] 88 taxmann.com 691 (Gujarat) and Bajaj Tempo Ltd. vs. Commissioner of Income Tax , 62

Taxman 480 (SC). 5.2 It was also submitted that in the appellant's own case for the assessment year 2014-15 and 2015-16 and 2016-17 the additional depreciation claimed has been allowed By CIT(A).

5.3 The ld. DR submitted that the ld. Tax Authorities below have passed reasoned orders with which he stands by.

6 Appreciating the matter on record and contentions of counsel it can be observed that Hon'ble Supreme Court of India in Scientific Engineering House

(P) Ltd. case has relied the following functional test as laid by House of Lords in IRC v. Barclay, Curie & Co. Ltd. [1970] 76 ITR 62 :

"..In order to decide whether a particular subject is an 'apparatus' it seems obvious that an enquiry has to be made as to what operation it performs. The functional test is, therefore, essential at any rate as a preliminary…"

"In other words, the test would be : Does the article fulfil the function of a plant in the assessee's trading activity? Is it a tool of his trade with which he carries on his business? If the answer is in the affirmative it will be a plant." 7. The bench is of considered opinion that since tools, dies, jigs etc. are used by the appellant for its business of manufacturing switchgear products it is

evident that moulds, dies and tools are not independent of the plant and

machinery, but are parts of the machinery. Once they are worn out, the

machines cannot turn out the product to the business specifications and this has

to be obtained only on a replacement of the tools or the dies and moulds.

Efaces Switchgear India Pvt. Ltd. 8. Further also, in asessee's own case in the subsequent years, the revenue has allowed the claim of additional depreciation on these tools etc. and thus the ground raised in the appeal is allowed.

9. Consequently, appeal of the assessee is allowed.

Order pronounced in open court on this 26^th day of April, 2022. Sd/- Sd/-

(R.K.PANDA) (ANUBHAV SHARMA)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Date:- 26..04.2022 *Binita, SR.P.S* Copy forwarded to:

1. Appellant

2. Respondent

3. CIT

4. CIT(Appeals)

5. DR: ITAT

ASSISTANT REGISTRAR

ITAT, NEW DELHI

EFACEC SWITCHGEAR IN... v. ACIT, CIRCLE- 8(1), ...