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

The first issue raised by the assessee is that the learned CIT(A) erred in confirming the addition made for Rs. 50,89,000/- on account of disallowances of donation.

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. Page 3 of 21

The assessee before the learned CIT(A) submitted that the AO erred in disallowing the sum of ₹50,89,000/- by merely describing it as “donation” and holding that the same lacked commercial expediency. The assessee clarified that the amount was not a voluntary or gratuitous donation, but was paid to Indus Charity, which was running a school for economically poor and underprivileged children in the adjacent premises belonging to the assessee trust. The land was leased to Indus Charity, and the school was operated using the same facilities, infrastructure and educational standards as those available in the assessee’s business school.

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.

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 Page 4 of 21

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.

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.

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

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. Page 6 of 21

The learned AR before us filed a paper book running from pages 1 to 72 and contended that the payment in dispute was paid in furtherance of the object of the trust and therefore the same should be allowed as deduction. It was also contended that the amount of donation was received from the students for making impugned payment and therefore such amount does not reflect the characteristics of income in the hands of the assessee. Without prejudice to the above, the learned AR contended that the assessee is eligible on such payment for deduction under section 80 G of the Act and therefore the same should be allowed to the assessee.

On the other hand, the learned DR before us vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. The issue before us is whether the amount of ₹50,89,000 paid by the assessee trust to Indus Charity and claimed as expenditure is allowable as a deduction, or whether the authorities below were justified in treating the same as a non-allowable donation.

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 Page 7 of 21

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.

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.

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 Page 8 of 21

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.

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.

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 Page 9 of 21

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.

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.

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 10 of 21

Before the learned CIT(A), the assessee submitted that it had acquired a windmill during the year under appeal at a total cost of ₹9,04,93,001. The windmill was put to use for generation of power and depreciation at the rate of 80% under section 32 of the Act was rightly claimed. In addition, the assessee claimed additional depreciation at 20% of the actual cost under section 32(1)(iia), as the assessee was engaged in the business of generation of power. The assessee furnished complete details during the assessment proceedings, including the depreciation working as per the Income-tax Act and the windmill ledger account.

It was argued that the AO erred in holding that the assessee was not eligible for additional depreciation on the ground that it was engaged only in imparting education and not in manufacture or production of any article or thing. The assessee pointed out that its trust deed had been duly amended to permit carrying on the business of power generation. A copy of the amended trust deed was furnished to the AO during the assessment proceedings. Further, the assessee had actually generated power from the windmill and had reported income of ₹69,57,955/- from windmill power generation, which was reflected in the schedule of other income. Therefore, the finding of the AO that the assessee was not engaged in the business of generation of power was factually incorrect. The assessee further submitted that electricity has been held to be “goods” under various judicial precedents. The amendment made by the Finance Act, 2012, inserting the words “or in the business of generation Page 11 of 21

With regard to depreciation on power evacuation infrastructure and transformer, the assessee contended that these assets are integral and inseparable parts of the windmill. Without the power evacuation infrastructure and transformer, the electricity generated by the windmill cannot be transmitted to the main grid. Therefore, these components form part of the windmill system and are eligible for depreciation at the same rate as the windmill itself. The AO erred in treating these items as general plant and machinery and restricting depreciation to 15% only.

The assessee also challenged the disallowance of depreciation on the amount paid for sub-lease or access rights over land. It was submitted that the assessee is not the owner of the land and has only acquired limited rights of access to install, operate, and maintain the windmill. The amount paid was not for acquisition of land but for facilitating access and use of the land for operating the windmill. These rights are directly linked to the installation and functioning of the windmill and therefore constitute part of the cost of the windmill. In support, the assessee relied on the invoice issued by the service provider, which clearly showed that the payment was for providing access and maintaining the surrounding area, and not for purchase of land. Page 12 of 21

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.

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) Page 13 of 21

Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

The learned AR before us submitted that the assessee is engaged in the business of power generation and therefore the same is eligible for additional depreciation. The learned AR further submitted that transformer and power evacuation infrastructure is integral part of the windmill and therefore the same is eligible for depreciation at the higher Page 15 of 21

On the other hand, the learned DR before us vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. The issue before us relates to the disallowance of depreciation and additional depreciation amounting to ₹2,49,45,801 in respect of the windmill, its peripheral components such as transformer and power evacuation infrastructure, and the treatment of lease rental / access rights of land.

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.

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 Page 16 of 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.

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.

4 The next issue relates to depreciation on transformer and power evacuation infrastructure. The lower authorities have treated these Page 17 of 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.

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

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.

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 Page 19 of 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.

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. Page 20 of 21

The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file