M/S. INDUS TRUST ,BENGALURU vs. ACIT, CIRCLE-2(2)(1), BENGALURU

PER WASEEM AHMED, ACCOUNTANT MEMBER:

“1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.

2. The learned CIT[A] is not justified in upholding the disallowance of the deduction claimed under the nomenclature of donation of Rs.50,89,000/- under the facts and in the circumstances of the appellant's case.

3. The learned CIT[A] is not justified in upholding the disallowance of a sum of Rs.2,49,45,801/- being the depreciation claimed under the facts and in the circumstances of the appellant's case.

4. The relevant facts are that the assessee, a trust, is running a school in the name and style of M/s Indus International School. The assessee trust is not charitable in nature as the school is run by the assessee on commercial parlance. The assessee is also in the business of windmill operation. During the year under consideration, the assessee has made payment aggregating to Rs. 50.89 Lakh to “Indus Charity” which is also running school for poor, needy and underprivileged students on the adjoining plot own by the assessee. The amount given to the “Indus Charity” is claimed as deductible expenditure in the books of account under the nomenclature as Donation. However, the said amount was disallowed by the AO in the assessment order by the AO by holding that said payment does not carry commercial expediency.

5. The aggrieved assessee preferred an appeal before the learned CIT(A).

6.1 It was explained that the assessee’s business school collected a small, fixed amount from each student specifically for supporting the education of underprivileged children. For the relevant year, ₹5,000 was collected from each of 1,015 students, aggregating to ₹50,75,000/-, which was paid to Indus Charity. This amount was duly credited as part of gross receipts under “Revenue from school fees” and correspondingly debited to the Income & Expenditure Account. Therefore, on basic accounting and matching principles, the expenditure necessarily had to be allowed.

6.2 The assessee further submitted that the activity was intrinsically connected to its core educational objects. Supporting education of underprivileged children was not alien to the assessee’s business but was in furtherance of its social and charitable obligations as an . educational institution. The expenditure ensured continuity of the school run by Indus Charity, which otherwise operated at a deficit due to nominal fees collected from poor students. The payment thus directly contributed to sustaining the educational ecosystem created by the board of trustee of the assessee.

6.3 It was contended that the test of commercial expediency must be applied from the perspective of a prudent businessman and not from a narrow or subjective view of the AO. The assessee considered it expedient to support the education of such children, with a long-term objective of nurturing academic talent and promoting educational excellence, which in turn enhanced the goodwill, reputation and social standing of the assessee institution.

6.4 Without prejudice, the assessee argued that even if the payment is viewed as a contribution, it was made wholly for educational and charitable purposes. Then exemption under section 80G of the Act should be granted as the payment was not incurred for any personal or non-business purpose. Hence, disallowance under section 37(1) of the Act was unwarranted.

6.5 It was also pointed out that the AO disallowed the claim mechanically without disputing the genuineness of the payment, the identity of the recipient, or the actual application of funds. All supporting documents, including ledger accounts, receipts and explanations, were duly furnished during assessment.

Page 5 of 21 6.6 Accordingly, the assessee prayed that the learned CIT(A) should appreciate the true nature of the transaction, the surrounding facts and the settled legal position, and delete the disallowance of ₹50,89,000/- in full.

6.7 However, the learned CIT(A) dismissed the assessee’s argument and confirmed the disallowance made by the AO by observing as under: 6.1 The appellant claimed as expense donation of Rs. 50,80,000 under the grouping “administrative expenses”. The AO disallowed the claim on the ground that the expense did not have any commercial expediency with regard to the business of the appellant. 6.2 In the submission filed the appellant has argued that “donation” actually represented the amount paid by the appellant to “Indus Charity” that was running a school for underprivileged children in the adjacent compound. According to the appellant, commercial expediency needed to be seen from the perspective of the business man. According to the appellant, the amount was paid from Rs. 5,000 collected from each of its 1015 students and if the deduction is disallowed, the amount should not be included under income. 6.3 As per section 37 only expenditure laid out wholly and exclusively for business along can be allowed as deduction under the head “business”. General 37 (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “profits and gains of business or profession”. 6.4 In other words, expenditure that has only a distant connection with business cannot be allowed as expense. From the explanation of the appellant it is evident that the “donation” made by the appellant is clearly a charitable expense. It cannot be regarded as business expense. Also there are provisions under the income tax Act such as 80G to claim such expense. This expense is certainly not allowable under section 37. 6.5 The appellant has argued that amount was collected from the students towards donation and if donation is disallowed, the same should be excluded from the scope of income. This argument is not tenable. All the receipts of a business constitute its income unless the receipt is a capital receipt. In this case, the amounts collected from students is revenue receipt for the school and hence comes within the purview of taxable receipts. In the light of the foregoing discussion, the disallowance of “donation” is upheld. Ground 3 is dismissed.

10.1 The undisputed facts are that the assessee is a trust running an educational institution in the name of Indus International School on commercial lines. It is also engaged in windmill operations. During the year under consideration, the assessee paid an amount of ₹50.89 lakh to .

Indus Charity, which was running a school for poor and underprivileged children on an adjacent plot owned by the assessee. The amount was claimed as expenditure in the books, though described as “donation”.

10.2 We note that the assessee’s consistent case has been that the nomenclature “donation” is misleading and does not reflect the true nature of the transaction. It has been explained that the assessee collected a fixed amount of ₹5,000/- per student from 1,015 students of its school, aggregating to ₹50.75 lakh, specifically earmarked for supporting education of underprivileged children. This amount was first credited as part of the gross receipts of the school and thereafter paid to Indus Charity. However, we note that the ld. AR at the time of hearing has not filed any piece of evidence in support of its contention and accordingly we hold that such amount cannot be allowed as an expenditure to the assessee.

10.3 Regarding the business expediency or commercial expediency, we note that the assessee by incurring such expenses is not getting any kind of benefit, including any sort of goodwill. The primary activity of the assessee being imparting education on the commercial principles and therefore such payment cannot be treated as an expenditure in the hands of the assessee.

10.4 Regarding the contention for the deduction under section 80 G of the Act, we find force in the argument of the learned counsel for the assessee. Accordingly, we direct the AO to allow the benefit of deduction to the assessee under section 80 G of the Act for the impugned payment discussed above but after necessary verification as per the provisions of . law. Hence the ground of appeal of the assessee is partly allowed for statistical purposes.

11. The next issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowance of depreciation for Rs. 2,49,45,801/- only.

12. The AO during the assessment proceeding observed that the assessee claimed depreciation at 80% along with additional depreciation of 20%, aggregating to ₹9,04,93,001, on the windmill. The AO examined the provisions of section 32(1)(iia) of the Act and noted that additional depreciation is allowable only where the assessee is engaged in the business of manufacture or production of any article or thing, or in the business of generation or generation and distribution of power. In the present case, the assessee was engaged in the business of imparting education and not in manufacturing or production of any article or thing. Therefore, the AO held that the assessee was not eligible for additional depreciation under section 32(1)(iia) of the Act. Reliance was placed on the decision of ITAT Chennai in the case of Shriva Cargo Movers Ltd. reported in 23 taxmann.com 184. Accordingly, the claim of additional depreciation was disallowed.

12.1 The AO further observed that the assessee claimed depreciation at 80% on transformer. It was held that a transformer is an apparatus for increasing or reducing voltage of alternate current and is not specific to a windmill. Since it is used in all types of power generation, it cannot be treated as part of windmill eligible for higher depreciation. Therefore, the AO held that the transformer falls under the general block of plant . and machinery and is eligible only for depreciation at 15%. Excess depreciation claimed was accordingly disallowed.

12.2 The AO also noted that the assessee claimed depreciation at 80% on contribution towards power evacuation infrastructure incurred for evacuating power from the windmill to the main grid. It was observed that such infrastructure is common to all types of power generation and is not unique to windmill operations. Hence, it was held that the asset is not eligible for higher depreciation and depreciation was restricted to 15%. Excess depreciation claimed was disallowed.

12.3 Further, the AO observed that the assessee claimed depreciation at 80% on sub-lease rights of land. It was held that, irrespective of the nomenclature, the underlying asset is land, which is not a depreciable asset under the Income-tax Act. Reliance was placed on the decision of the Hon’ble Bombay High Court in CIT vs. Indian Oil Corporation Ltd. Reported 218 ITR 511 wherein it was held that leasehold land should be grouped under land and depreciation cannot be claimed on the premium paid. Accordingly, depreciation claimed on sub-lease rights of land amounting to ₹21,50,000 was disallowed.

12.4 Based on the above findings, the AO recalculated the eligible depreciation by classifying the various components of the windmill project under assets eligible for 80% depreciation, 15% depreciation, or not eligible for depreciation, and disallowed the excess depreciation claimed by the assessee for Rs. 2,49,45,801/- only and added to the total income of the assessee.

Page 12 of 21 16.1 It was further argued that even otherwise, similar payments for leasehold or access rights have been held to be allowable, either as revenue expenditure or as part of the cost of the plant, by judicial authorities. Reliance was placed on decisions of the jurisdictional Tribunal in case of M/s VLS Mining Company Pvt Ltd in wherein depreciation or deduction was allowed in respect of lease-related payments connected with business assets. The assessee submitted that the AO failed to properly appreciate the nature of the payment and mechanically treated it as land cost.

16.2 In view of the above facts and legal position, the assessee prayed that the learned CIT(A) may hold that the assessee is eligible for additional depreciation under section 32(1)(iia) of the Act, that depreciation at the rate applicable to windmills be allowed on power evacuation infrastructure and transformer, and that the disallowance of depreciation on access or sub-lease rights of land be deleted. The assessee accordingly requested that the additions made by the AO on account of disallowance of depreciation be fully deleted.

17. However, the learned CIT(A) dismissed the argument advanced by the assessee and confirmed the disallowances made by the AO by observing as under: 6.16 In the previous year, the appellant installed a windmill. On this the appellant claimed depreciation @ 80% and additional depreciation of 20%. The AO denied 80% depreciation to peripheral components of windmill such as (1) power evacuation infrastructure (2) transformer and sub lease rights of land. Also the AO denied the claim of additional depreciation as the AO held that the appellant was not engaged in manufacturing. 6.17 Regarding the disallowance of the claim of additional depreciation, the appellant has argued that the trust deed permits it to carry on “power generation”, that in the previous year it generated power and that power is “goods” under various laws. 6.19 As per section 32(1)(iia)

(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing [or in the business of generation or generation and distribution of power], a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii). 6.20 It is evident that the appellant entered the business of generation of power generation in the previous year by installing the wind mill in question. In the previous year the appellant disclosed income of Rs.69,57,955 on account of power generation. But there is no such income in the preceding year. Therefore the appellant cannot be regarded as being engaged in the business of generation or generation and distribution of power. Hence the appellant is not eligible for additional depreciation. 6.21 The AO has referred to the decision of the ITAT Chennai bench in the case of Shiva Cargo Movers Ltd [2012] 23 taxmann.com 184 (Chennai). The assessee was engaged in the business of transport of spirit and molasses. It acquired a new windmill during the previous year and claimed depreciation thereon. The assessee also claimed additional depreciation under section 32(1)(iia) on such windmill. The Assessing Officer denied additional depreciation on ground that original business of the assessee was not manufacturing or producing any article or thing, but only transporting; and that wind energy undertaking of the assessee could not be treated as an undertaking engaged in manufacture of article or thing. The ITAT held that although the generation of power amounted to manufacture of “article or thing”, the assessee was not “engaged in the business of power generation”. An assessee not into any business of manufacture or production, was not eligible for claiming additional depreciation under section 32(1)(iia). In the light of the foregoing discussion, the disallowance of additional depreciation is upheld. 6.22 The AO denied 80% depreciation on peripheral components of wind mill such as (1) power evacuation infrastructure and (2) transformer. On these items the AO allowed only normal 15% depreciation. The appellant has argued that these are integral parts of windmill and hence eligible for 80% depreciation. 6.23 As per New Appendix I of IT Rules, “windmills and specially designed devices which run on wind mills” are eligible for 80% depreciation. In this case, (1) power evacuation infrastructure and (2) transformer cannot be regarded as specially designed devices which run on wind mills. The windmill is capable of generating power independent of the (1) power evacuation infrastructure and (2) transformer and these are also not exclusive accessories which can only function with the windmill. These do not serve any special purpose which can be identified with the functioning of the windmill or generation of renewable energy. These are only devices to provide connectivity to the grid and such (1) power evacuation infrastructure and (2) transformer will work equally well with a hydel power system or with a thermal power system. 6.24 Hence the disallowance of depreciation with regard to (1) power evacuation infrastructure and (2) transformer is upheld. 6.25 The AO disallowed depreciation on leased land (Rs.21.5 lakhs) obtained in connection with installation of windmill. According to the AO, since land is .

Page 14 of 21 not a depreciable asset, no depreciation was allowable. The appellant has argued that payment should be allowed as a revenue expenditure. 6.26 The argument of the appellant is reproduced below: Similarly, it is submitted that the amount paid by the appellant to get the right to access to the land on which the windmill is standing is also part of the windmill cost. It is submitted that the appellant is not owner of the piece of land and only has right of access and thus, all the aforesaid amounts are integral part of the windmill eligible for depreciation and additional depreciation. A copy of the invoice of Sarjan Realities Limited dated 21/10/2011 for a sum of Rs.21.50 lakhs is enclosed herewith as Annexure-4, which clearly states that the invoice is raised for the consideration of providing easy and free access and keeping the area vacant surrounding the land on which the windmill project of the appellant is situated. Infact, the appellant has also paid service-tax for the aforesaid amount, which very clearly establishes that he only having the right of access and does not become the owner of the said land through which he gets access. Reliance is also placed on the decision of the jurisdictional Tribunal in the case of M/s. VSL Mining Company Pvt. Ltd., in and 204/Bang/2014 dated 28/06/2019 (copy enclosed herewith as Annexure-5) wherein, the Hon’ble ITAT had an occasion to consider a similar case were the first appellate authorities had confirmed the disallowance of depreciation in respect of the cost incurred for taking land on lease. Attention is invited to para (8) at page (15) of the said order wherein, the lease rent paid for acquiring leasehold of the land was fully allowed, as revenue expenditure u/s.37(1) of the Act. 6.27 The appellant has incurred an expense of Rs.21,50,000 for obtaining lease hold rights over a piece of land. Depreciation cannot be allowed on Leasehold Rights as same is not Intangible Asset. (Please see the decision of ITAT Cuttack in Mahanadi Coalfields Ltd. Vs DCIT ITA No. 174/CTK/2018). The claim of the appellant that the expense should be allowed as revenue expense is also not tenable as the lease confers enduring advantage and is not a revenue expense. Ground 5 is dismissed.

21.1 At the outset, it is an admitted position that the assessee installed a windmill during the previous year relevant to Assessment Year 2012-13 at a total cost of ₹9,04,93,001/- and the windmill was put to use for generation of power. It is also undisputed that income from power generation of ₹69,57,955/- was disclosed in the return of income. Therefore, the fact of generation of power during the year is not in dispute.

21.2 The AO as well as the learned CIT(A) denied additional depreciation under section 32(1)(iia) of the Act mainly on the ground that the assessee was primarily engaged in the activity of imparting education and was not engaged in the business of manufacture or production or in the business of generation of power. In our considered . view, this approach is too narrow and does not accord with the scheme of the Act.

21.1 Section 32(1)(iia) of the Act, as applicable to the year under appeal, clearly provides for additional depreciation in the case of an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power. The assessee has placed on record the amended trust deed permitting it to carry on the business of power generation. More importantly, the assessee has in fact generated power and earned income therefrom during the year under consideration. Once an assessee has entered into the business of power generation and has commenced generation, it cannot be said that it is not engaged in such business merely because the activity was not carried on in the earlier years.

21.3 The reliance placed by the lower authorities on the decision of the ITAT Chennai in Shiva Cargo Movers Ltd. is, in our view, distinguishable on facts. In the present case, the assessee has not only installed the windmill but has also generated power and disclosed income therefrom. Therefore, the assessee satisfies the statutory condition of being engaged in the business of generation of power. Accordingly, we hold that the assessee is eligible for additional depreciation under section 32(1)(iia) of the Act. The disallowance of additional depreciation is therefore directed to be deleted.

21.4 The next issue relates to depreciation on transformer and power evacuation infrastructure. The lower authorities have treated these .

Page 17 of 21 assets as general plant and machinery eligible only for 15% depreciation on the reasoning that they are not exclusively designed for windmills.

21.5 We are unable to agree with this reasoning. A windmill is not a standalone asset that can function independently without supporting systems. The electricity generated by the windmill has no commercial value unless it is stepped up, regulated, and evacuated to the grid. The transformer and power evacuation infrastructure are therefore functionally inseparable and integral parts of the windmill system. Without these components, the windmill cannot effectively perform its intended function of generation and supply of power.

21.6 It is well settled that for depreciation purposes, a functional test has to be applied. When assets form part of a composite system and are necessary for the operation of the main plant, they must be treated as part of that plant. Applying this principle, we hold that the transformer and power evacuation infrastructure are part and parcel of the windmill and are eligible for depreciation at the same rate as applicable to the windmill itself. In this regard we also find support and guidance from the judgment of Hon’ble Rajasthan High Court in the case of CIT vs. K.K. Enterprise, reported in 51 taxmann.com 190, where it was held as under: In CIT v. Parry Engg. and Elecronics (P.) Ltd. [IT Appeal No. 604 of 2012, dated 29-1-2013] the Gujarat High Court held that Windmill would require a scientifically designed machinery in order to harness the wind 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 .

Page 18 of 21 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. [Para 6] 21.7 We also find force in the submission of the assessee that depreciation is a tax-neutral exercise. Over a period of time, the entire cost of the asset is to be allowed by way of depreciation on the written down value method. The dispute is only with regard to the timing and rate of allowance. The assessment year involved is 2012-13, and a considerable period of time has elapsed. If depreciation rates are altered at this stage, the effect will spill over to several subsequent years, leading to repeated re-computation and unnecessary administrative burden, without any real revenue gain to the exchequer. This practical aspect also supports a consistent and pragmatic approach. Accordingly, we direct the AO to allow depreciation on transformer and power evacuation infrastructure at the rate applicable to windmills.

21.8 The assessee has also incurred an amount of ₹21,50,000/- towards leasehold / access rights of land for installation and operation of the windmill. The lower authorities have denied depreciation on the ground that land is not a depreciable asset and have also rejected the alternative claim of revenue expenditure. On this issue, we agree that depreciation per se cannot be allowed on land or leasehold rights over land, as land is not a depreciable asset under the Act. However, the nature of the payment made by the assessee needs to be appreciated in the correct perspective. The assessee is not the owner of the land. The payment was made only to obtain access rights and to facilitate . installation, operation, and maintenance of the windmill. The invoice and supporting documents show that the payment was for providing access and keeping the surrounding area vacant, and not for acquisition of ownership rights.

21.9 Such expenditure does not result in acquisition of a capital asset owned by the assessee. It merely enables the assessee to carry on its business more efficiently. Even if the benefit extends over more than one year, that by itself is not determinative of the expenditure being capital in nature. Considering the facts of the case, we are of the view that if depreciation is not allowable on this payment, the same is allowable as revenue expenditure under section 37(1) of the Act. Accordingly, we direct the Assessing Officer to allow the lease rental / access right payment of ₹21,50,000/- as revenue expenditure under section 37(1), in case depreciation is not granted on the same.

21.10 In view of the above discussion, we hold that the assessee is eligible for additional depreciation under section 32(1)(iia) of the Act, which is directed to be allowed. Transformer and power evacuation infrastructure are integral parts of the windmill and are eligible for depreciation at the same rate as applicable to windmills. Depreciation on leasehold rights of land is not allowable; however, the expenditure incurred towards lease rental / access rights is allowable as revenue expenditure under section 37(1) of the Act. Accordingly, we hereby set aside the finding of the learned CIT(A). Hence the ground of the appeal raised by the assessee is hereby allowed.

Order pronounced in court on 19th day of December, 2025