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Whether straightline method of depreciation is available for all

QUESTION: Straightline method of depreciation was permitted by amendments to Sec. 32(1) by Rule 5(1A) for electricity companies. It is misunderstood by some officers that this is applicable for all assessees engaged in generation of power including those who have set up windmills.

At best, it is an option, which has to be specifically discarded, if they want to avail normal depreciation of 80 per cent. Is such a view correct?

ANSWER: Sec. 32(1)(i) and Rule 5(1A) read with Appendix 1A which provide for straightline method of depreciation are applicable only to an assessee engaged solely in the business of generation and distribution of power and are obliged in law to prepare accounts under the provisions of the Electricity Act, 1948. For others, Appendix 1 alone will have application.

“Statement of Objects and Reasons” for the amendment in Income-tax (Amendment) Bill, 1998 reads: “With a view to enabling power generating units to depreciate their capital assets in a straightline method at the same rate at which it is reimbursed by the State Electricity Board under the Electricity (Supply) Act, 1948, it is proposed to make amendment in Sec. 32 of the Income-tax Act. With this amendment, there will be lower tax reimbursed by the State Electricity Board, consequently, a lower power tariff rate.” What is applicable only to such assessees could have no application for others like those who produce power by windmills or solar energy. There is, therefore, no question of any option.

The Tribunal in Dy. CIT v SAMKRG Pistons & Rings Ltd. (2009) 34 SOT 401 (Hyd) has held that block concept continues to apply to all others not governed by Indian Electricity Act. In K.K.S.K. Leather Processors (P) Ltd. v ITO (2010) 126 ITD 215 (Chennai), it was decided on assumption of requirement of option for straightline depreciation that an assessee by claiming depreciation under Appendix I at 80 per cent should be treated to have exercised option for such depreciation. In K. Ravi v Asst.CIT (2010) 2 ITR (Trib) 752 (Chennai), on the erroneous view that assessee running a windmill was entitled to straightline method of depreciation, the option should be exercised in a return filed in time and that a delayed return will forfeit right to normal depreciation not only in the year of late return but also for later years.

Since the law in the Statement of Objects and Reasons, the clarification, the statutory provision and the Rule would make available straightline depreciation only for electricity companies and not to others, the question of exercise of option by filing a return would not arise.

The Board is better advised to correct the wrong inference drawn even by the Tribunal and some of the assessing officers so as to avoid litigation in the light of the objective of enhanced rate of depreciation meant as an incentive for power generation.

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