Income Tax Appellate Tribunal - Chandigarh
Avon Cycles Ltd., Ludhiana vs Department Of Income Tax on 8 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'A', CHANDIGARH
BEFORE Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER
ITA No.1143/Chd/2011
(Assessment Year : 2008-09)
The A.C.I.T., Vs. Avon Cycles Ltd.,
Circle V, G.T.Road,
Ludhiana. Ludhiana.
PAN: AABCA4140R
And
C.O.No.1/Chd/2012
Arising out of
ITA No.1143/Chd/2012
(Assessment Year : 2008-09)
Avon Cycles Ltd., Vs. The A.C.I.T.,
G.T.Road, Circle V,
Ludhiana. Ludhiana.
PAN: AABCA4140R
(Appellant) (Respondent)
Assessee by : Shri Subhash Aggarwal
Department by : S m t . J yo t i K u m a r i , D R
Date of hearing : 08.11.2012
Date of Pronouncement : 17.01.2013
ORDER
PER SUSHMA CHOWLA, J.M, :
The appeal filed by the Revenue is against the order of the Commissioner of Income-tax(Appeals)-II, Ludhiana dated 28.09.2011 r e l a t i n g t o a s s e s s m e n t ye a r 2 0 0 8 - 0 9 a g a i n s t t h e o r d e r p a s s e d u / s 1 4 3 ( 3 ) of the Income Tax Act, 1961 (in short 'the Act'). The assessee has filed Cross Objections against the appeal filed by the Revenue. 2
2. Both the appeal of the Revenue and the Cross Objections filed by the assessee on the similar issue were heard together and are being disposed off by this consolidated order for the sake of convenience.
3. The Revenue in ITA No.1143/Chd/2011 has raised following grounds of appeal:
"1. (a) That the Ld. CIT(A)-II, Ludhiana, on facts as well as in law has erred in deleting disallowance of Rs 56,98,192/- made u/s 36(i)(iii) of the I.T. Act, 1961.
(b) That the Ld. CIT(A)-11, Ludhiana has failed to appreciate that the assessee has admitted that the investment of Rs.
4,75,00,000/- was to earn capital gain. As such this is for non- business purpose and the decision of the Hon'ble Punjab & Haryana High Court in the case of M/s Abhishek Industries Ltd., is squarely applicable.
2. (a) That the Ld. C1T(A)-II, Ludhiana, on facts as well as in law has erred in deleting disallowance of Rs. 42,68,522/- out of total disallowance of Rs.47,68,522/- made u/s 14A of I.T. Act, 1961 read with rule 8-D of I.T .Rules.
(b) That the Ld. CIT (A)-I1, Ludhiana has failed to appreciate that the assessee had made investments which would generate exempted income and thus section 14A read with Rule 8D of the 1. T. Act, 1961 comes into play.
3. That the Ld. C1T(A)-11, Ludhiana, on facts as well as in law has erred in deleting disallowance of Rs. 110,04,200/- made an account of depreciation claimed on PEF and transmission lines used with wind Turbine Generator.
4. That the order of the CIT (A)-ll, Ludhiana be set aside and that of the A.O. be restored.
5., That the appellant craves leave to add or amend any ground of appeal before it is finally disposed."
4. The assessee in C.O.No.1/Chd/2012 has raised following grounds of appeal:
"1. That the learned CIT(A)-II, Ludhiana, has erred in confirming the disallowance of Rs.5,00,000/- u/s 14A of the Income Tax Act, 1961 r.w. rule 8D of the Income Tax Rules.
2. That in any case the above disallowances are against the law and facts of the case and ignoring the submissions made by the appellant."3
5. The brief facts relating to ground No.1 are that the assessee had invested Rs.4.75 crores in the purchase of agricultural land at village More Karima and Shekhpura. The said investment totaling Rs.4.70 c r o r e s w a s m a d e i n t h e p r e c e d i n g ye a r s a n d o n l y s u m o f R s . 5 l a c s w a s p a i d o n 1 1 . 4 . 2 0 0 7 i . e . d u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n . The plea of the assessee before the Assessing Officer was that the said investment was made out of own funds and no disallowance out of interest paid on b o r r o w i n g s w a s m a d e i n t h e e a r l i e r ye a r , a s n o b o r r o w i n g s w e r e u s e d f o r making the said investment. Even sum of Rs.5 lacs was made out of its o w n i n c o m e o f t h e ye a r u n d e r c o n s i d e r a t i o n , w h i c h w a s d e c l a r e d a t Rs.10.20 crores. The Assessing Officer rejecting the claim of the a s s e s s e e d i s a l l o w e d a s u m o f R s . 5 6 , 9 2 , 1 9 8 / - a p p l yi n g t h e p r o v i s i o n s o f section 36(1)(iii) of the Act.
6. Before the CIT (Appeals) the assessee furnished the copies of bank a c c o u n t r e f l e c t i n g t h e i n v e s t m e n t m a d e i n t h e e a r l i e r ye a r s a n d R s . 5 l a c s i n v e s t e d d u r i n g t h e ye a r o u t o f i t s o w n f u n d s . The CIT (Appeals) vide para 4.1 at page 6 of the appellate order observed as under:
"4.1 Ground No. 1 of the appellant is against disallowance of interest of Rs.56.98,192/- u/s 36(l)(iii) of the Income Tax Act, 1961. The AO found that the assessee had invested a sum of Rs.4.75 Crores in the purchase of land and on the basis of P&H judgment in the case of CIT vs. Abhishek Industries Ltd disallowed the interest @ 12% on the said investment amounting Rs. 56,98,192/-. The appellant submitted that out of the total investment of Rs.4.75 Crores, a sum of Rs.4.70 Crore was invested in the preceding years and no disallowance was made on the same. It was only sum of Rs.5 Lacs which was invested during the year which was out of appellant's own funds. In support the appellant had filed copies of bank account showing the availability of funds on the dates when earlier investments and payment of Rs. 5 Lacs during the year was made. It has further been submitted thatt the Appellant's declared income during the year was a sum of Rs.10,20,27,250/- in addition to the availability of cash in form of depreciation. On perusal of the record I find the contention of the appellant is correct and the made by the AO is here by deleted."4
7. The Revenue is in appeal against the said deletion of addition of Rs.56,98,192/- made under section 36(1)(iii) of the Act. The learned D.R. for the Revenue admitted that sum of Rs.4.70 crores was invested d u r i n g t h e p r e c e d i n g ye a r a n d o n l y R s . 5 l a c s w a s i n v e s t e d d u r i n g t h e year under consideration. The claim of the learned D.R. for the Revenue is that the money was diverted for non business purposes and consequently the disallowance of interest attributable to such investment was to be made out of interest paid on borrowings raised by the assessee. Reliance was placed on the ratio laid down by the Hon'ble Punjab & H a r ya n a H i g h C o u r t i n C I T V s . A b h i s h e k I n d u s t r i e s [ 2 8 6 I T R 1 ( P & H ) ] and also in Munjal Sales Corporation Vs. CIT [298 ITR 288 (P&H)].
8. The learned A.R. for the assessee pointed out that the total receipts o f t h e a s s e s s e e f o r t h e ye a r u n d e r c o n s i d e r a t i o n w e r e t o t h e t u n e o f R s . 2 7 c r o r e s a n d d u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n o n l y i n v e s t m e n t o f Rs.5 lacs was made. The balance investment was claimed to be made in t h e p r e c e d i n g ye a r s o u t o f i t s o w n f u n d s a n d n o d i s a l l o w a n c e w a s m a d e o u t o f i n t e r e s t e x p e n s e s i n t h e e a r l i e r ye a r s . R e l i a n c e w a s p l a c e d o n t h e r a t i o l a i d d o w n b y t h e C h a n d i g a r h B e n c h o f t h e T r i b u n a l i n t h e D.C.I.T., V s . S a m r a t F o r g i n g L t d ., ITA No.975/Chd/2011 r e l a t i n g t o a s s e s s m e n t ye a r 2007-08, order dated 24.5.2012 and also the ratio laid down by the Hon'ble Supreme Court in Munjal Sales Corporation Vs. CIT [298 ITR 298 (SC)].
9. We have heard the rival contentions and perused the record. The assessee had made investment totaling Rs.4.75 crores in the purchase of agricultural land as under:
14/1/2006 Rs.1,50,00,000/-
9/3/2006 Rs. 20,00,000/-
15/2/2007 Rs.2,43,00,000/-
5
15/2/2007 Rs. 57,00,000/-
11/4/2007 Rs. 5,00,000/-
10. The finding of the CIT (Appeals) vide para 4.1 of the appellate order is that the assessee had furnished the copies of bank accounts reflecting availability of funds on the dates when earlier investments w e r e m a d e a n d a l s o w h e n p a ym e n t o f R s . 5 l a c s w a s m a d e d u r i n g t h e year. The learned D.R. for the Revenue has not controverted the factual finding of the CIT (Appeals) that the total investment made by the a s s e s s e e i n t h e e a r l i e r ye a r s a n d t h e s u m o f R s . 5 l a c s i n v e s t e d d u r i n g t h e year were out of its own funds and not out of borrowed funds.
11. The Hon'ble Apex Court in Munjal Sales Corporation Vs. CIT [298 ITR 298 (SC)] has reversed the findings of the Hon'ble Punjab & H a r ya n a H i g h C o u r t i n t h a t a s s e s s e e ' s c a s e a n d a p p e a l f i l e d b y t h e Revenue against that assessee reported in 298 ITR 288 & 294 r e s p e c t i v e l y. T h e H o n ' b l e S u p r e m e C o u r t h a v e a l l o w e d t h e a p p e a l o f t h e assessee against the disallowance of interest under section 36(1)(iii) of the Act in view of the profits earned by the assessee against which interest free loan of Rs.5 lacs being advanced to the sister concern. In view of the ratio laid down by the Hon'ble Supreme Court in the case of Munjal Sales Corporation Vs. CIT (supra) we find no merit in the pleadings of the learned D.R. for the Revenue placing reliance on the r a t i o l a i d d o w n b y t h e H o n ' b l e P u n j a b & H a r ya n a H i g h C o u r t , w h i c h have been reversed by the Hon'ble Supreme Court.
12. In the facts of the present case where loan of Rs.5 lacs has been a d v a n c e d d u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n a n d t h e b a l a n c e l o a n having been advanced in the earlier years, where no disallowance was made out of interest expenditure and the assessee having established the availability of the non interest bearing funds, we are in conformity with 6 the order of the CIT (Appeals). The ground No.1 raised by the Revenue is thus dismissed.
13. The issue raised by the Revenue vide ground No.2 is against the disallowance of Rs.42,68,522/- made under section 14A of the Act read with Rule 8D of the Income Tax Rules. The assessee vide Cross Objection is in appeal against the disallowance of Rs.5 lacs under section 14A of the Act read with Rule 8D of the Income Tax Rules. Both the ground of appeal raised by the Revenue and the assessee on the same issue are being dealt with hereunder.
14. The brief facts relating to the issue are that the assessee during the year under consideration had shown total investment in shares and mutual funds as on 31.3.2008 at Rs.21.04 crores as against Rs.16.32 crores shown as on 31.3.2007. The assessee in its computation of income had disallowed sum of Rs.1,84,180/- and Rs.12,10,915/- on account of expenditure relatable to the earning of exempt income. The total dividend income earned by the assessee was Rs.22,57,454/- and the long term capital gains exempt under section 10(38) of the Act was Rs.93,77,270/-. The assessee claimed that it had made investment during t h e ye a r o u t o f i t i s o w n f u n d s a v a i l a b l e o n a c c o u n t o f s h a r e c a p i t a l , reserves, surplus and depreciation totaling Rs.113.61 crores. The Assessing Officer, however, invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules disallowed sum of Rs.47,68,522/-.
15. Before the CIT (Appeals) the plea of the assessee was that the Assessing Officer had ignored the disallowance made by the assessee and had also overlooked the entries in the bank accounts which reflected credit balance in the bank accounts whenever investment in the shares 7 and mutual funds were made by the assessee. The second plea of the assessee before the CIT (Appeals) was that the assessee had earned interest income of Rs.3.96 crores as against the payment of Rs.2.92 crores, which included the interest on term loan amounting to Rs.83.20 lacs. The claim of the assessee before the CIT (Appeals) was that no disallowance is warranted under section 14A read with Rule 8D of the Income Tax Rules. The CIT (Appeals) also verified the bank account entries from where the investments were made and the conclusion of the CIT (Appeals) was that most of the investments have been made out of own funds and no interest had been disallowed in the past. The CIT (Appeals) further disallowed Rs.5 lacs over and above the disallowance made by the assessee totaling Rs.13,95,065/-. Both the Revenue and the assessee are in appeal against the order of the CIT (Appeals).
16. The Revenue has raised the issue vide ground No.2 of its appeal and the assessee has filed Cross Objection against the same. The learned D.R. for the Revenue pointed out that the provisions of Rule 8D were applicable to the instant assessment year as held by the Hon'ble Bombay H i g h C o u r t i n G o d r e j & B o yc e M f g . C o . L t d . V s . D C I T & A n o t h e r [ 3 2 8 ITR 81 (Bom)] and it was fairly admitted b y the learned D.R. for the Revenue that the assessee had disallowed sum of Rs.13,95,065/- on account of direct expenses relatable to the earning of exempt income. The CIT (Appeals) further disallowed Rs.5 lacs.
17. The learned A.R. for the assessee furnished detailed chart in respect of disallowance made under section 14A of the Act by the Assessing Officer and pointed out that the investment in the shares/mutual funds were out of own funds and no borrowed funds were utilized for making the said investment and hence no disallowance was warranted under Rule 8D(2)(ii) of the Act. Further in respect of 8 disallowance made under Rule 8D(2)(iii) the learned A.R. for the assessee pointed out that the assessee had on its own disallowed sum of Rs.13,95,065/- on account of the direct expenditure relatable to the earning of the exempt income and no further disallowance was warranted under Rule 8D(2)(iii) of the Income Tax Rules. The next plea of the learned A.R. for the assessee was that in view of the ratio laid down by the Calcutta Bench of the Tribunal in DCIT Vs. Trade Apartment Ltd. ITA No.1277/2011, dated 13.3.2012, the total interest received b y the assessee being Rs.3.96 crores and the interest paid being Rs.2.92 crores, as there was net interest received, no further disallowance was warranted under Rule 8D of the Income Tax Rules. It was also pointed out that the interest paid on borrowals made for specific purpose was not to be considered and out of total interest paid of Rs.2.92 crores, interest on term loan raised for financing the windmills and Mercedes car were Rs.83,20,558/- and interest paid on banking credit loan was Rs.87,59,761/- and balance interest paid was Rs.1.21 crores. The last plea of the assessee was that the Assessing Officer had not taken the total value of asset correctly in as much as the current liabilities and provisions had been deducted, which should not have been deducted and in case the formula applied, the correct figure of disallowance would be Rs.10,49,851/-, against which the assessee itself had disallowed sum of Rs.13,95,065/-. Further the learned A.R. for the assessee placed reliance on the series of decisions of various Benches of the Tribunal.
18. We have heard the rival contentions and perused the record. The assessee had made investment in shares and mutual funds on which it had earned dividend income of Rs.22,47,454/- which was exempt and had further shown long term capital gains at Rs.93,77,270/- which was claimed as exempt under section 10(38) of the Act. The CIT (Appeals) 9 on the perusal of the evidence filed had given a finding vide para 4.3 that most of the investment had been made out of own funds in the past. The findings of the CIT (Appeals) in para 4.3 are as under:
"4.3 Ground No. 3 is against the disallowance of Rs. 47,68,522/- made by the A.O applying the provision of section 14A of IT Act read with rule 8D of IT Act. The AO found that as per the balance sheet of company there was an investment of Rs.21,04,53,694/- as on 31.03.2008 as against investment of Rs. 16,32,53,010/- as 31.03.2007 and the appellant had incurred interest liability of Rs.2,91,79,406/-during the year. The AO reproduced the provisions of section 14A of IT Act and owed a sum of Rs.38,34,256/- and further a sum of Rs.9,34,266/- equal to ½ % of the average of the value of investment and thus made a total disallowance 47,68,522/-. The appellant vide reply dated 17.11.2010 submitted that a sum 13,95,065/- has already been disallowed by the appellant on account of expenses incurred for earning the exempt income. The appellant before me has submitted that the total dividend income which was claimed exempt was a sum 22,57,454/- and long term capital gains of Rs.93, 77,2 70 claimed exempt under section 10(38) and all the investments made during the year as per page 36 of paper book were made out of appellant's own resources and not out of any borrowings. The appellant has filed copies of the relevant bank entries to show that whenever any investment was made there was always a credit balance available in the bank accounts. It has further been submitted that the appellant had earned an interest income of Rs.3,95,64,326/- from the market on the advances made by the appellant which is far more than the interest paid by the appellant. The appellant relied on the judgment of Mumbai High Court in the case of CIT vs. Reliance Utilities & Power Ltd reported in (2009) 313 ITR 340 (Bom) to buttress his claim regarding the availability of funds with the company as per the details given in the written submissions. Further reliance has also been placed on the judgment of the Hon'ble Supreme Court in the case of Munjal Sales Corporation vs. CIT reported in (2008) 298 ITR 298 (SC) and judgment of the Hon'ble Karnataka High Court in the case of CIT vs. Sridev Enterprises (1991) reported in 192 ITR 165 (Kar). The appellant has also filed copies of the judgment s of the Hon'ble Tribunal in appellant's own case for the assessment year 2005-06 and 2006-07 where additions made u/s 14A stood deleted under similar circumstances. Reliance has also been placed in the case of CIT vs. Hero Cycles Ltd. reported in (2010) 323 ITR 518 (P&H) where in on similar issue the disallowance made stood deleted.
I have perused the record and hold that the AO was not justified in disallowing a sum of Rs. 47,68,522/-, whereas, assessee has made disallowance of Rs.13,95,065/- only. It is also the fact that most of the investments have been made out of own funds in past. However, considering the totality of the facts it would be fair to restrict disallowance at Rs.5,00,000/- on adhoc basis to cover any of the expenses left by the appellant during self disallowance of Rs.13,95,065/- in his computation. Therefore, this ground of the appellant is partly allowed and he gets relief amounting to Rs.42,68,522/- remaining Rs.5,00,000/- is hereby upheld."10
19. The CIT (Appeals) also considered the plea of the assessee that against the interest expenditure of about Rs.2.91 crores, the assessee had earned interest income of Rs.3.95 crores and consequently the disallowance made by the Assessing Officer was not justified. However, an adhoc disallowance of Rs.5 lacs as made by the CIT (Appeals).
20. We find merit in the plea of the assessee that where the investment in the shares and mutual funds were made out of its own funds and no borrowed funds were utilized for making the said investment in the e a r l i e r ye a r s , n o d i s a l l o w a n c e w a s w a r r a n t e d u n d e r s e c t i o n 1 4 A o f t h e Act read with Rule 8D of Income Tax Rules. In the facts of the present case before us the investment made by the assessee as on 31.3.1998 amounting to Rs.21.05 crores and as on 31.3.2008 was Rs.16.32 crores. The Assessing Officer had considered the position of asset as appearing in the Balance Sheet of the assessee on the first day and the last date of t h e ye a r a t R s . 1 3 7 . 7 2 c r o r e s a n d R s . 1 4 6 . 6 8 c r o r e s r e s p e c t i v e l y a n d determined the average at Rs.142.20 crores and had computed the disallowance under Rule 8D(2)(ii) at Rs.38,34,256/- and under Rule 8D(2)(iii) at Rs.9,34,266/-. The learned A.R. for the assessee had furnished on record the audited set of Balance Sheet and has pointed out that the total value of asset taken by the Assessing Officer on the first day at Rs.137.72 crores was incorrect as the current liabilities and the provision totaling Rs.62.25 crores, once added back the total value of the assets would be Rs.199.96 crores as on 31.3.2007. S i m i l a r l y, t h e total value of asset taken by the Assessing Officer on the last date at Rs.146.68 crores was net of the current liabilities and provision of Rs.84.04 crores which once added would total to Rs.230.72 crores which would be the value of the assets as on 31.3.2008. The average of the two would be Rs.215.34 crores and applying the formula under Rule 8D(2) 11
(ii) of the Income Tax Rules the disallowance works out to Rs.10,49,851/-. The assessee had disallowed sum of Rs.13,95,065/- paid for the portfolio management.
21. On the perusal of the provisions of Rule 8D of the Income Tax Rules we find that the expenditure relatable to the earning of exempt income is equal to aggregate of the amount of expenditure directly relatable to the income which does not form part of the total income i.e. Rule 8D(2)(i) and the disallowance of interest as provided under Rule 8D(2)(ii) and further disallowance computed under Rule 8D(2)(iii) of the Income Tax Rules. The disallowance made by the assessee on account of direct expenditure relatable to the earning of exempt income i.e. fee paid for portfolio management totaling Rs.13,95,065/- is disallowable under Rule 8D(2)(i) of the Income Tax Rules. Under the provisions of Rule 8D(2)(ii) the interest relatable to the investment in tax free funds is to be computed and as per the working of the assessee itself the same c o m e s t o R s . 1 0 , 4 9 , 8 5 1 / - . C o n s e q u e n t l y, w e d i r e c t t h e A s s e s s i n g O f f i c e r to disallow Rs.10,49,851/- being the interest so relatable to the earning of exempt income. We find no merit in the alternate plea raised by the assessee that no disallowance of interest is called for after setting off the interest paid and interest received, where there is no interest p a ym e n t . Admittedly the assessee had paid total interest of Rs.2.92 crores out of which interest paid on term loan raised for specific purpose totals to Rs.1.70 crores and balance interest paid by the assessee is Rs.1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the In come Tax Rules the disallowance is confirmed at Rs.10,49,851/-. We find no merit in the adhoc disallowance made by the CIT (Appeals) at Rs.5,00,000/-. 12 Consequently ground of appeal raised by the Revenue is partly allowed and ground raised by the assessee in Cross Objection is allowed.
22. The ground No.3 raised by the Revenue is against the disallowance made out of depreciation claimed on power evacuation facility and transmission lines used.
23. The brief facts as noted b y the CIT (Appeals) were as under:
"4.4 Ground Nos. 4 & 5 are against AO's action in not allowing depreciation claimed @ 80% on Power Evacuation Facility and processing charges provided in & allowing only 15% depreciation on Power Lines claimed @ 80%. discussed this issue in para 7, pages 10 to 20 of the order. Brief facts are given by the AO in his order and by the appellant in his written submissions.
The brief facts are that the appellant has put up two windmills in Gujarat and the total expenditure of Rs.18,00,72,824/- was incurred on the same which included a sum of Rs.92.10 Lacs for Power Evacuation Facility and on processing charges, and Rs.57,48,000/- on electrical transmission lines. The appellant claimed depreciation @ 80% on the total amount. The AO did not allow any depreciation on the amount incurred on Power Evacuation Facility and allowed 15% depreciation on electrical transmission lines holding that the expenditure relating to Power Evacuation Facility is a capital expenditure which can not be treated as part of the block of renewable energy devices being wind mill eligible for depreciation @ 80% and the assessee is not the owner of PEF thus no depreciation is allowable on the same. As regards electrical lines for power transmission, these are eligible only for normal rates of depreciation @ 15% and they are not part of power generation wind mill device."
24. During the appellate proceedings, the CIT (Appeals) made certain enquiries which were as under:
During the examination of this issue I directed the appellant's counsel to file copies of the bills of all the expenditure incurred on the windmills in support of ownership and further confirmation from suppliers regarding transfer of PEF and that they have not claimed any depreciation on the same. The appellant vide his reply dated 14.05.2011 and 09.08.2011 filed the copies of the bills along with other relevant correspondence and certificate from the suppliers Suzlon Energy Ltd regarding 13 the arrangements for Power Evacuation Facility and the opinion of the experts on the subject namely Deloitte Hakins & Sells, Pune and Walker, Chandiok & Co, Pune. The confirmation from Suzlon Energy Ltd reads as under: -
"This has reference to your query seeking clarification with regards to costs borne by you on setting up of Power Evacuation Facility for the wind mill in the State of Gujarat.
1. The Power Evacuation Facility (PEF) set up by us for you is part & parcel of the Wind Mill. PEF or the wind mill would be useless without the other.
Existence of both is imperative for running of wind mill. This facility is set up jointly for group of wind mills as it is not viable or feasible to set up independent PRF for each and every individual wind mill owner.
2. All operational and beneficial rights attached to the Power Evacuation facility have been transferred to you. You are part of owner of PEF till the life of the wind mill.
3. Suzlon Energy has never claimed any depreciation on this Power Evacuation Facility."
The appellant further submitted that Power Evacuation Facility and electrical transmission lines' are capital assets to put the windmill in an operational condition. There was no justification to bifurcate this expenditure from the cost of the windmills as without this expenditure the windmills would be rendered useless. The replies filed by the appellant before the AO are reproduced at pages 11-15 of the order."
25. The conclusion of CIT (Appeals) at page 9 of the appellate order was as under:
I have gone through the order of the AO and the replies filed by the it and other case law cited by the appellant, I am of the opinion that the AO is not justified in not allowing depreciation on the Power Evacuation Facility on the ground that the appellant was not the owner of the same. There is sufficient evidence produced by the appellant on the ownership issue. I hold that PEF is part and parcel of the wind mill and the wind mill cannot run without PEF. The assessee has furnished details of payments and has categorically brought on record fact that he is part owner of PEF and hence has claimed proportionate depreciation on his part of ownership contribution only. The counsel's plea that even otherwise since the expenditure is for the purpose of running business, then alternatively he has been allowed the full of such expenses as revenue expenses wring the year. I have 14 also carefully considered the copy of letter written by the Suzlon Ltd. to the appellant, the bill raised by the Suzlon Ltd. in favour of the appellant, various judgements on the issue cited by the assessee's counsel and after considering all these documents and submissions, it is clear that Power Evacuation Facility (PEF) is part of the wind mill because otherwise the running of wind mill would not have been possible and the same view has been taken as per judgement cited (Supra). As far as, the issue of ownership is concerned, the assessee has submitted adequate evidence in support of his contention which is beyond doubt that he has made contribution to the part ownership of the asset and the letter of -M/s Suzlon Ltd., also confirms this fact coupled with the fact that they have not claimed any depreciation on this asset. The copy of letter of Suzlon Ltd. addressed to the appellant is made as part of this order as Annexure 'A'. It was also be Relevant to note here that these expenses have been incurred by the assessee for running of business and alternatively plea of the appellant's counsel that if it is not for the sake of arguments it is not treated as capital asset then the whole of such expenses should be allowed as revenue expenses during the year because it is incurred for business. Considering all these facts, the AO is directed to allow depreciation at the rate of 80 per cent on power evacuation facility, processing charges and power lines as provided in the rules.
Therefore, the grounds of appeal of the appellant at Sr.No.4 and 5 are, therefore, allowed."
26. The learned D.R. for the Revenue placing reliance on the observations of the Assessing Officer stressed that no depreciation was allowable on the power evacuation infrastructure facility(PEF in short) and depreciation @ 15% was correctly allowed on the transmission lines. The plea of the learned D.R. for the Revenue was that the assessee was not the owner of power evacuation facility and the same was not exclusively dedicated to the windmill of the assessee. It was further pleaded by the learned D.R. for the Revenue that the intention of the Legislature was to allow higher depreciation on windmills and not on every facility attached to it.
27. The learned A.R. for the assessee placed reliance on the observations of the CIT (Appeals) and pointed out that Annexure annexed to the order of the CIT (Appeals) established that PEF facililty 15 was part of windmill. It was further pointed out by the learned A.R. for the assessee that windmill could not run without the said facility as had been held by the Mumbai Bench of the Tribunal in Trumac Engineering Co. Pvt. Ltd. Vs. Income Tax Officer in ITA No.555/Mum/2003 relating t o a s s e s s m e n t ye a r 1 9 9 6 - 9 7 , o r d e r d a t e d 2 7 . 6 . 2 0 0 8 . F u r t h e r r e l i a n c e w a s placed on the judgment of Pune Bench of the Tribunal in Poonawala Finvest & Agro P. Ltd. Vs. ACIT (2008) 118 TTJ 68 (Pune).
28. We have heard the rival contentions and perused the record. The issue arising vide present ground of appeal is in relation to allowability of depreciation on power evacuation infrastructure facility and also on the transmission lines. The plea of the assessee was that the said power evacuation infrastructure facility was part and parcel of the windmill, which could not run without the same. The assessee claimed to have m a d e p a ym e n t s t o S u z l o n E n e r g y L t d . f o r b e c o m i n g p a r t o w n e r o f t h e s a i d f a c i l i t y a l o n g w i t h o t h e r p e r s o n s w h o w e r e u t i l i z i n g t h e s a i d f a c i l i t y. The assessee had claimed depreciation on the said part ownership as the facility was set up by Suzlon Energy Ltd. jointly for group of windmills, as it was not viable to set up independent power evacuation infrastructure facility for each and every individual owner of the windmill. It was also certified b y Suzlon Energy Ltd. that the ownership of the said asset has been transferred to the assessee and no depreciation was claimed by them on the said power evacuation infrastructure f a c i l i t y. T h e c o n f i r m a t i o n f r o m S u z l o n E l e r g y L t d . h a s b e e n r e p r o d u c e d b y the CIT (Appeals), cop y of which is filed by the assessee during the course of hearing, which reads as under:
"This has reference to your query seeking clarification with regards to costs borne by you on setting up of Power Evacuation Facility for the wind mill in the State of Gujarat.
16
1. The Power Evacuation Facility (PEF) set up by us for you is part & parcel of the Wind Mill. PEF or the wind mill would be useless without the other.
Existence of both is imperative for running of wind mill. This facility is set up jointly for group of wind mills as it is not viable or feasible to set up independent PRF for each and every individual wind mill owner.
2. All operational and beneficial rights attached to the Power Evacuation facility have been transferred to you. You are part of owner of PEF till the life of the wind mill.
3. Suzlon Energy has never claimed any depreciation on this Power Evacuation Facility."
29. The assessee had also claimed the transmission lines through which electricity is transmitted to Electricity Board as part and parcel of the windmill. The Assessing Officer had allowed depreciation on the same at lower rates.
30. The Mumbai Bench of the Tribunal in Trumac Engineering Co. Pvt. Ltd. Vs. Income Tax Officer (supra) held that transmission lines are part and parcel of the windmill and are entitled to depreciation @ 100%. The CIT (Appeals) while deciding the appeal of the present assessee before us referred to the decision in Trumac Engineering Co. Pvt. Ltd. Vs. Income Tax Officer (supra) and observed as under:
"The other judgment cited by the counsel is in the case of Trumac Engineering Company Pvt. Ltd vs. ITO of ITA No. 555/Mum/2003. The issue related to reopening u/s 147 and also to depreciation on the wind mill. As per as reopening was concerned it was decided against the assessee. The other issue were dealt on merits. The assessee had capitalized some of Rs. 42.50 Lakhs being the payment on account of contribution made to GEDA for creation of common sub-station for evacuation of power from wind farm. The AO held the claim of the assessee is not allowable as the payment is not made for creating an asset nor it is owned by the assessee. The assessee failed before the CIT(A) and hence the appeal before the Hon'ble Tribunal. The Tribunal examined the facts of the case in detail and held as under:-17
"Considering the rival submissions, we are of the view that the assessee's appeal is o be allowed on merit. Firstly, it is to be seen that these machineries had no independent functioning as such. Merely because it improves the working system or controlling/monitoring system, it cannot be treated as an independent machinery and not part of the integrated machinery. The submission of the learned counsel is that if the machinery installed at the first stage of installing the windmill itself, the claim of the assessee would have been allowed. Merely because for some reason or other it was subsequently installed does not mean that it is not a part of the machinery as such. Since the machinery had no independent functioning, we are of the view that the claim of the assessee is to be allowed. Coming to the payment made to GEDA, we are of the view that the decision of the Hon'ble Calcutta High it in the case of Birla Jute Manufacturing Ltd (Supra) is clearly applicable. In case of Excel Industries Ltd (Supra), the Hon'ble Bombay High Court held; payment made for overhead service line, which remained the property of tricky Board is allowable as revenue expenditure. On facts, in the instant case tie assessee, the payment to GEDA is to be allowed in the light of this decision of the jurisdictional High Court. Hence, appeal by the assessee with regard to l,2,3,and 4 are allowed"
31. The Pune Bench of the Tribunal in Poonawala Finvest & Agro P. Ltd. Vs. ACIT (supra) held as under:
"I have gone through the judgment reported in (2008) 118 TTJ 68 (Pune)(Tribunal). One of the issues in the said judgment related to depreciation in respect of electrical items like transformer and internal lines upto metering for which the assessee had paid Rs. 7.00 Lakhs to Suzlon Developers Pvt. Ltd. This gadget was for transmission of electrical power generated upto sub-division of MSEB. The Hon'ble Tribunal held that the electrical energy so produced by the wind mill is a waste if it is not transmitted to MSEB sub-station. The function of such unit is that the electricity so generated is required to be transferred and transmitted to cable line upto sub-station, where the actual units so generated are stored and metered. Since this is the function of transformer upto DP structure, hence ought to be held as an integral part of wind mill and is consequently entitled for higher rate of depreciation.
The facts of the case are identical with the facts of the appellant."
18
32. The Ahmedabad Bench of the Tribunal in ACIT(OSD) Vs. Parry Engineering & Electronics P. Ltd. in ITA No.3317/Ahd/2011 with C.O.No.44/Ahd/2012 held as under :
"4. We have considered rival submissions and perused the orders of the AO and the CIT(A). The depreciation is allowable on renewable energy device which also includes windmill. The depreciation at the rate of 80% is allowable on the entire device which is capable of generating electricity using wind energy. There is no provision in the Act to bifurcate the device into several parts and allow depreciation thereon at different rates of depreciation. The foundation, civil and electrical works are necessary for the installation of the windmill and is clearly part and parcel of the windmill project on which depreciation at the rate of 80% is allowable. The CIT(A) has referred to the decisions of the High Courts while deciding the issue in favour of the assessee. Accordingly, the ground taken in the appeal of the Revenue with regard to the depreciation and additional depreciation on the foundation, civil & electrical works, installation, payment to GEDA is dismissed. However, with regard to depreciation on the capitalized interest, there is no finding in the orders of the AO and the CIT(A) that no part of the borrowed amount was utilised for the purchase of the land. Accordingly, this limited issue is restored to the file of the AO with the directions to verify the facts and in case the borrowed amount has been utilised for the purpose of purchase of the land, then to disallow the depreciation on the capitalized interest to that extent. We direct accordingly."
33. In the present facts and circumstances of the case where the a s s e s s e e i s p a r t o w n e r o f p o w e r e v a c u a t i o n i n f r a s t r u c t u r e f a c i l i t y, t h e assessee is entitled to claim depreciation on the said asset. Under the provisions of section 32 of the Act, depreciation is allowable on the asset whether owned wholly or partly by the assessee but the condition is that the same should be used for the purposes of business. In view of the ratio laid down by the Pune Bench of the Tribunal in Poonawala Finvest & Agro P. Ltd. Vs. ACIT (supra), the Mumbai Bench of the Tribunal in Trumac Engineering Co. Pvt. Ltd. Vs. Income Tax Officer (supra) and the Ahamedabad Bench of the Tribunal in ACIT(OSD) Vs. Parry Engineering & Electronics P. Ltd. (supra), we hold that the power 19 evacuation infrastructure facility is part and parcel of the windmill though partly owned by the assessee on which the assessee is entitled to the claim of depreciation at the same rate on which depreciation was allowed on the windmill. Further the assessee is also entitled to the claim of depreciation at higher rate on the transmission lines which again are part and parcel of the windmill. Upholding the order of the CIT (Appeals) we dismiss ground No.3 raised b y the Revenue.
34. In the result, the appeal of the Revenue is partl y allowed and the Cross Objection filed by the assessee is allowed.
Order Pronounced in the Open Court on 17th d a y o f J a n u a r y, 2013.
Sd/- Sd/-
(MEHAR SINGH) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 17th January, 2012
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh 20