Court Rules Generation of Electricity Qualifies as Production of Article or Thing Under Income Tax Act, Rejecting Revenue's Revision Under Section 263
In a landmark decision dated October 5, 2026, the Rajasthan High Court (Division Bench) delivered a significant judgment in the appeal filed by the Commissioner of Income Tax, Udaipur, against M/s Hindustan Zinc Ltd. The Court upheld the claim of additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961, on new plant and machinery installed at the company's Captive Power Plant (CPP) and Wind Power Plant (WPP). This ruling reinforces the interpretation that electricity generation constitutes the production of an article or thing, thereby entitling manufacturers to enhanced tax benefits on machinery used for power generation.
The case arose when Hindustan Zinc Ltd., engaged in the business of manufacturing zinc, lead, silver, and related minerals, claimed additional depreciation of Rs. 18,87,27,973 for the Assessment Year 2007-08 on machinery installed at their CPP and WPP. The Assessing Officer allowed this claim during scrutiny under Section 143(3). However, the Commissioner of Income Tax (CIT) exercised revisional powers under Section 263, contending that power generation does not amount to manufacture or production of an article or thing and thus the claim was not permissible.
On appeal, the Income Tax Appellate Tribunal (ITAT) reversed the CIT's order, holding that the generation of electricity qualifies as "production" within the meaning of the statute, and that the Assessing Officer's order was neither erroneous nor prejudicial to the revenue. The ITAT's decision was challenged by the Revenue before the Rajasthan High Court.
The High Court, after thorough examination, confirmed the ITAT's findings. It emphasized the twin conditions under Section 263 for revisional jurisdiction: the order must be both erroneous and prejudicial to the interests of revenue. Since the Assessing Officer had adopted a permissible legal view supported by precedent, the Court held that the CIT could not revise the order merely because of disagreement with that view.
The Court highlighted key legal principles, including the Supreme Court's recognition that electricity is a movable property and falls within the definition of "goods" or "article or thing" under the Income Tax Act. Citing authoritative judgments such as State of Andhra Pradesh v. National Thermal Power Corporation Ltd. and PCIT v. Damodar Valley Corporation, the Court underscored that generation of power amounts to production and qualifies for additional depreciation benefits.
The judgment also clarified that the statutory conditions for additional depreciation under Section 32(1)(iia)-the machinery must be new, acquired and installed after March 31, 2005, and the assessee must be engaged in manufacturing or production-were fulfilled by Hindustan Zinc Ltd. The machinery installed at the CPP and WPP met these criteria, and the power generated was used in the company's manufacturing processes.
Consequently, the Court dismissed the Revenue's appeal, affirming the law that electricity generation by a manufacturer is covered under the additional depreciation provisions. The parties were left to bear their own costs.
This ruling provides clarity and confidence to industrial units investing in captive and renewable power plants, reaffirming their entitlement to tax incentives under the Income Tax Act. It also restricts the scope of revisional powers under Section 263, ensuring that lawful assessments are not disturbed without cogent reasons.
Bottom Line:
Income Tax - Additional depreciation under Section 32(1)(iia) of the Income Tax Act is allowable on new plant and machinery installed in Captive Power Plant and Wind Power Plant where assessee is engaged in manufacture/production and machinery was acquired and installed after 31.03.2005 - Power/electricity amounts to article or thing and generation of power amounts to production - Revisional jurisdiction under Section 263 can be exercised only when assessment order is both erroneous and prejudicial to interests of Revenue.
Statutory provision(s):
Income Tax Act, 1961 Sections 32(1)(iia), 143(3), 253, 260A, 263
