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Income Tax Appellate Tribunal, JAIPUR BENCH ‘B’, JAIPUR
Before: Shri Vijay Pal Rao, JM & Shri Vikram Singh Yadav, AM vk;dj vihy la-@ITA No. 313/JP/2019
ORDER
PER VIJAY PAL RAO, JM
This appeal by the assessee is directed against the order of ld. CIT(A), Ajmer dated 09-01-2019 for the Assessment Year 2012-13. The assessee has raised the following grounds. ‘’1. The ld. CIT(A) has erred in law and facts in sustaining action of the AO of not treating Rs. 30,19,569/- being cost on civil engineering work carried out for laying foundation of solar power panels and proportionate interest thereon, as cost of solar power plant and thereby curtailing
The ld. CIT(A) has further erred in law and on facts in sustaining application of 3.02% rate of depreciation on expenses aggregating Rs. 30,19,569/- incurred on civil engineering work and proportionate interest thereon (supra) without assigning specific head of asset item to these expenses.
The ld. CIT(A) has again erred in law and on facts in upholding the Assessing Officer’s action of treating the interest earned on fixed deposits during preoperative period (i.e. prior to commencement of production of solar power) as income from other sources instead of treating the same as an item of reduction in cost of plant.’’ 2.1 The Ground No. 1 and 2 of the assessee are regarding disallowance of higher reduction of depreciation on the cost of civil engineering works for laying foundation of solar power panels.
2.2 The assessee is a company and engaged in the generation of solar power. The assessee filed its return of income on 28-09-2012 declaring total loss of Rs. 4,65,24,365/-. During course of scrutiny assessment, the AO noted that the assessee has installed the solar plant during the year under consideration which has become operational in the month of January, 2012. The AO further noted that the assessee has claimed depreciation @ 7.69% for less than 180 days on plant and machinery works. The AO was of the view that the cost of civil engineering works is not eligible for depreciation of higher rate as applicable on solar power plant and consequently the AO has allowed depreciation @ 3.02% of less than 180 days.
2.3 Aggrieved by the order of the AO, the assessee filed the appeal before the ld. CIT(A) but could not succeed.
2.4 Before us, the ld.AR of the assessee submitted that the cost of civil engineering works would be part of cost of installation of solar plant as it is necessary to facilitate the fixing of solar power panels to earth and other electrical fittings forming part of the solar power plant. The ld.AR further submitted that the civil engineering works is carried out specifically for installation of the solar power plant and it has no other purpose than generation of solar power. The ld.AR thus submitted that the cost of civil engineering works would be part of the cost of installation of solar power plant and therefore, eligible for depreciation as applicable on the solar power plant and not on building as applied by the AO. In support of his contentions, the ld.AR of the assessee relied on the decision of Hon'ble Jurisdictional High Court in the case of CIT vs K.K. assessee submitted that Hon'ble Jurisdictional High Court has reiterated its view in the case of CIT vs Mehru Electricals & Mechanical Engineers (P) Ltd. [2016] 388 ITR 169 (Raj.). Thus in view of the judgement of Hon'ble Jurisdictional High Court in the case of CIT vs K.K. Enterprises (supra), the depreciation on cost of civil engineering works is part and parcel of the solar plants and is allowable at the rate as applicable on the solar plant itself.
2.5 On the other hand, the ld. DR submitted that the AO has clearly brought the facts of bifurcated cost of solar plant as well as civil engineering works carried out by the assessee and thereby the AO allowed depreciation on the cost of solar power plant at a higher rate as applicable on plant and machinery whereas the depreciation in respect of civil engineering works was allowed as applicable on building. Thus the ld. DR relied on the orders of lower authorities.
2.6 We have considered the rival submissions as well as relevant materials available on record. The AO noted that the assessee has claimed depreciation on solar power plant which includes the cost of civil engineering works of Rs. 30,19,569/-. Thus the AO was of the view that engineering works as the same is eligible for depreciation as applicable on building and not the rate of depreciation on plant and machinery. The AO accordingly bifurcated total cost of solar power plant and separated the cost of civil engineering works and allowed depreciation on the same at the rate as applicable on building and consequently the disallowance of Rs. 70,508/- was made by the AO. The AO has not disputed the fact that soil leveling and other civil works carried out by the assessee is not required for installation of solar power panels. Therefore, the expenditure which is incurred by the assessee in the process of installation of solar panels is for the purpose of solar power plant. Thus the cost of said work cannot be separated from the installation of solar power plant and entire cost of solar power plant is eligible for depreciation as applicable for plant and machinery. The Hon'ble Jurisdictional High Court in the case of CIT vs K.K. Enterprises (supra) while upholding the order of this Tribunal has held in para 5 and 6 as under:-
‘’5. We do not find any merit in the argument advanced. 6. The issue involved in these appeals has been considered by the Hon'ble Gujarat High Court in Tax Appeal No.604/2012, decided on 29.1.2013, in CIT v. Parry Engg. and Electronics (P.) Ltd. In the case aforesaid Hon'ble Gujarat High Court held that "Windmill would require a scientifically designed machinery in order to harness the wind
6 M/s. Chandraleela Power Energy vs ITO , Ward- 6(3)Jaipur energy to the maximum potential. Such device has to be fitted and mounted on a civil construction, equipped with electric fittings in order to transmit the electricity so generated. Such civil structure and electric fittings, therefore, it can be well imagined, would be highly specialized. Thus, such civil construction and electric fitting would have no use other than for the purpose of functioning of the windmill. On the other hand, it can be easily imagined that windmill cannot function without appropriate installation and electrification. In other words, the installation of windmill and the civil structure and the electric fittings are so closely interconnected and linked as to form the common plant. As already noted, the legislature has provided for higher rate of depreciation of 80 per cent on renewable energy devises including windmill and any specially designed devise, which runs on windmill. The civil structure and the electric fitting, equipments are part and parcel of the windmill and cannot be separated from the same. The assessees claim for higher depreciation on such investment was, therefore, rightly allowed."
Accordingly in view of the facts, circumstances of the case as well as the binding precedent of Hon'ble Jurisdictional High Court the case of CIT vs K.K. Enterprises (supra), we decide the issue in favour of the assessee and thereby the addition made by the AO on account of disallowance of depreciation is deleted.
3.1 The Ground No. 3 of the assessee is regarding the addition on account of interest on Fixed Deposits during pre-commencement period as income from other sources.
3.2 The AO noted that the assessee has made the provision of interest received on FDRs and transferred the same to plant and machinery and thereby reduced the cost of plant and machinery which is solar power from other sources and consequently the addition of Rs. 3,19,263/- was made by the AO. The assessee challenged the action of the AO before the ld. CIT(A) but could not succeed.
3.3 Before us, the ld.AR of the assessee submitted that the fixed deposits were made with the Bank for furnishing the bank guarantee to IREDA, A Central Govt. Agency, as per the conditions for granting sanction to set up solar power plant. Therefore, when the fixed deposits has a direct nexus with the setting up of solar power plant then the interest on said fixed deposits for pre-operative period would be in the nature of capital receipt and would reduce the cost of solar power plant.
Thus the ld.AR of the assessee submitted that said interest cannot be treated as Revenue receipt or income of the assessee. In support of his contentions, the ld.AR of the assessee relied on the decision of Hon'ble Delhi High Court in the case of Pr. CIT vs Facor Power Plant [2016] 237 Taxman 0613/380 (Del) as well as in the case of Indian Oil Panipat Power Consortium Ltd vs ITO [2009) 181 Taxman 0249 (Del).
3.4 On the other hand, the ld. DR has relied on the orders of the lower authorities. materials available on record. It is noted that the assessee in its reply filed before the AO has specifically explained that the assessee has to provide the bank guarantee to IREDA for setting up of solar power plant. The ld.AR further submitted that for the purpose of providing bank guarantee, the assessee company has to make fixed deposits with Indian Overseas Bank. Thus the fixed deposits were made to avail the bank guarantee to be provided to IREDA for getting license of solar power plant. Therefore, the ld.AR of the assessee contended that fixed deposits are inextricably linked with setting up of solar power plant. Thus the interest earned during pre-operative period would go to reduce the cost of project.
Similar contentions were raised by the assessee before the ld. CIT(A) alongwith various decisions on this point. However, the ld. CIT(A) without dealing with the decisions on the point has upheld the addition made by the AO. The Hon'ble Delhi High Court in the case of Pr. CIT vs Facor Power Plant (supra) after considering the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172(SC) has held in para 11 to 13 as under:-
‘’11. From the above extract, it is evident that the test that is required to be employed is whether the activity which is taken up for setting up of the 9 M/s. Chandraleela Power Energy vs ITO , Ward- 6(3)Jaipur business and the funds which are garnered are inextricably connected to the setting up of the same. In the present case, findings of fact have been returned by the Commissioner of Income Tax (Appeals) and have been confirmed by the Income Tax Appellate Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The learned counsel for the revenue has also not been able to point out any perversity in such finding and, therefore, the factual findings have to be taken as those accepted by the Income Tax Appellate Tribunal which is the final fact finding authority in the income tax regime. That being the case, the decision of the Division Bench in Indian Oil Panipat Power Consortium Ltd. (supra) would squarely apply to the facts of the present case and the Tribunal was right in applying the same.
Before parting with this decision, we would, however, like to comment upon a contention which has been raised by the learned counsel for the revenue. He submitted that the Tribunal in the impugned order made an observation in paragraph 8 of the impugned order which gives an impression that if funds were obtained through raising share capital as distinct from borrowed funds, then the question of interest derived on placing those funds in a fixed deposit amounting to 'income from other sources' would not arise. Such an impression ought not to be gathered from the Tribunal's decision because the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) had clearly stated that whether the funds are raised by issue of shares and debentures or through borrowing would not make any difference to the principles set out thereunder. The principle being that if the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated, will be of a revenue nature and not accretion of capital.
In the present case, there is a finding of fact that the money placed in the fixed deposit was inextricably linked with the setting up of the power plant. Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings.’’ Hence if the fixed deposits were made to avail the bank guarantee for setting up of the solar power plant then it is inextricably linked with the setting of solar power plant and consequently the interest on said fixed receipt. Following the judgement of Hon'ble Delhi High Court in the case of Pr. CIT vs Facor Power Ltd. (supra), we decide this issue in favour of the assessee and against the Revenue. Thus the addition made by the AO is deleted. The Ground No. 3 of the assessee is allowed.
4.0 In the result, the appeal of the assessee is allowed
Order pronounced in the open court on 02/03/2020.