Encouraging energy sector

Recently, the textile industry resorted to a temporary suspension of production to protest power cuts including unscheduled ones. The demand for power is increasing as the economy is on the growth trajectory and the national agenda is for increasing the GDP by accelerating industrialisation.

Concessional duties and taxes play some role in attracting investments to certain priority or thrust areas of the economy. Generation of electricity continues to occupy prominent position with regard to fiscal incentives, be it by way of tax exemptions or subsidy for encouraging such activity.

Section 80-IA of the Income-Tax Act, 1961 provides fillip to power generating companies and the outcome of the same is borne by the fact that we occupy globally fourth or fifth position in generation of wind energy.

This could be achieved because of the tax incentives and liberal depreciation allowance.

The twin tax incentives were almost like amnesty scheme by which 80 per cent of the investment is protected from tax levy because of depreciation and the income generated after recovery of investment was also exempt from tax for a continuous period of 10 financial years out of 15 years at the choice of the taxpayer.

Withdrawal of exemption

The tax exemption was withdrawn in the Finance Act, 2011 and any undertaking generating electricity will not be eligible for tax exemption in respect of income where it begins operation after March 31, 2012. However, the original investment continues to remain eligible for 80 per cent tax protection by way of depreciation. No reasons were given for withdrawal of exemption inspite of persisting deficit in power generation.

Even when the exemption was granted with regard to income, the controversy in tax administration revolved around many technical issues. Some of the issues are (a) the year of commencement of activity cannot be treated as ‘initial assessment year' and only when the taxpayer makes a claim for deduction, that year is to be taken as the ‘initial assessment year' for determining the number of years for which the deduction is permissible (Poonawalla Estate Stud & Agro Farm (P) Ltd v. Asstt. CIT (48 DTR (Pune) (Trib) 210)); (b) the claim of enhanced depreciation as reflected in the return filed before the due date under Section 139(1) supported by depreciation claim of in the books of account tantamounts to the exercise of option for enhanced depreciation (K.K.S.K.Leather Processors (P) Ltd v. ITO (2010) 38 DTR (Chennai) (Trib) 182); and (c) the deduction under Section 80-IA is to be allowed by treating the undertaking on standalone basis.

Depreciation including depreciation of the earlier years attributable to power generating unit is to be adjusted against its income on notional basis even if they were adjusted against other incomes of the taxpayer (Hyderabad Chemicals Supplies Ltd v. Asstt. CIT (2011) 53 DTR (Hyd.)(Trib) 371).

In effect, the tax incentive is given only after the entire capital cost is offset against income of the power generating unit; and (d) the losses pertaining to earlier years preceding the year of opting the claim of deduction under section 80-IA is not to be adjusted for computing the deduction. (Mohan Breweries & Distilleries Ltd v. CIT (2008) 23 SOT 32 (Chennai)).

When the economy badly needs electricity production for sustaining the growth momentum, the tax administration must be advised to adopt interpretation of legal and procedural requirements liberally since the collection of tax cannot be the singular isolated motive in pursuit of economic development. Also, the withdrawal of exemption requires re-look to restore incentive to this sector for fuelling the economic growth.

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