R.RAVISHANKAR,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the Order dated

02.09.2015 of Commissioner of Income Tax (Appeals)-2, Chennai, in ITA

No.99/CIT(A)-2/2013-14 for the AY 2010-11 and raised the following

grounds: 1. The order of The Commissioner of Income Tax (Appeals)-2, Chennai, dated 02.09.2015 in ITA No.99/CIT(A)-2/2013-14 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.

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2.0 All the grounds of the appeal are related to the disallowance of

depreciation on land for erecting the wind mill. During the assessment

proceedings, the Assessing Officer (in short ‘AO’) found that the assessee

has installed a wind mill with the cost of Rs.1.08 Cr., and out of the total

cost of Rs.1.08 Cr., a sum of Rs.3.00 lakhs was paid towards the cost of

the land which is used for erection and commissioning of the wind mill.

The assessee has claimed the depreciation on wind mill @80% on total

cost including the land cost of Rs.3.00 lakhs. The AO disallowed the

depreciation on the land cost amounting to Rs.3.00 lakhs.

3.0 Aggrieved by the order of the AO, the assessee went on appeal

before the Ld.CIT(A) and the Ld.CIT(A) dismissed the appeal of the

assessee and found that the assessee is not entitled for depreciation on

land cost.

4.0 Aggrieved by the Ld.CIT(A)’s Order, the assessee filed the appeal

before this Tribunal.

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During the appeal, the Ld.AR argued that wind mill should be

considered as a single unit without identifying the same into different

parts. The expenses incurred in connection with the utilization of the land

should not be construed in general parlance and the immovable property

should be considered as expenses inextricably linked to serve the

technical requirements for installation and erection of the wind mill so as

to bring the wind mill into working condition. The Ld.AR submitted that

for erecting the wind mill suitable land is required and wind mill cannot be

installed at every place. Further, proper foundation with proper mixture of

concrete and with the technical specifications, foundation should be laid

and then only the wind mill can be erected only after taking all the

precautions. Hence, the Ld.AR of the view that the entire cost of the wind

mill including the land cost and civil works cost along with the wind mill

cost should be considered as the cost of the wind mill and depreciation

should be allowed on the entire investment including the land cost. The

Ld.AR relied on the ITAT Chennai order in ITA No.176/Mds/2010 in the

case of M/s.Asian Handlooms vs. DCIT-II, Trichy. On the other hand, the

Ld.DR argued that the land is not a depreciable asset and the depreciation

is not provided for in the schedule of depreciation. All the superstructures

should be required to be constructed separately on the land and the

depreciation is allowed only on superstructures. Some of the

superstructures such as factories, buildings, etc., and IT corridors requires

special construction and separate quality of foundation with technical

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expertise even such constructions, the land is considered to be separate

item and no depreciation is allowed. The Ld.DR further submitted that

Ld.CIT(A) relied on the decision of Apex Court in the case of Alps Theatre

[1967] reported in 65 ITR 377 and held that the cost of the land is not

entitled to depreciation along with the cost of building standing thereon.

Therefore, the Ld. DR argued that the Hon’ble ITAT’s decision in the case

of M/s.Asian Handlooms vs. DCIT-II, Trichy cited supra is not correct

interpretation of Law and should not be followed.

5.0 We heard the rival submissions and perused the material placed on

record.

The assessee has erected the wind mill on the land and paid

compensation for utilizing the land. The compensation paid for utilizing

the land is claimed as depreciation. The depreciation is not provided for

in Income Tax Act u/s.32 on in Deprecitiation schedule on land. As per

the provisions of Sec.32, the depreciation is allowed on building &

machinery, plant or furniture being tangible assets. In the Income Tax

Rules, depreciation schedule also the land is not included for the purpose

of depreciation. All the superstructures required to be constructed on the

land. The depreciation is provided for wear and tear of the asset and the

land is not the depreciable asset. The Ld.CIT(A) relied on the decision of

the Hon’ble Supreme Court cited supra and the relevant portion of the

Ld.CIT(A) order is reproduced as under:

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The Apex Court, in the case of CIT Vs. Alps Theatre [1967] 65 ITR 377 (SC), has held that cost of land is not entitled to depreciation along with cost of building standing thereon.

M/s.Alps Theatre is an exhibitor of films. The question of law raised before the Apex Court was:

“Whether the cost of land is entitled to depreciation under the Schedule to the Income Tax Act along with the cost of the building standing thereon?”

The relevant portion of the judgment of the Apex Court is as follows:

“Then we come to sub-clause (vi), the relevant portion of which reads as under:

“in respect of depreciation of such buildings, machinery’, plant or furniture being the property of the assessee, a sum equivalent ... as may in any case or class of cases be prescribed.”

It would be noticed that the word used is “depreciation” and “depreciation” means:

’a decrease in value of property through wear, deterioration or obsolescence: the allowance made for this in book-keeping, accounting, etc. (Webster’s New World Dictionary).”

In that sense land cannot depreciate.”

The Hon’ble Supreme Court is referring to the true interpretation of Section 10(2)(vi) of the Indian Income-Tax Act, 1922 and in particular, whether the word ‘building’ occurring in it includes land. The Apex Court, on considering the meaning of the word “depreciation”, has held that land cannot depreciate.

The conclusive portion of this judgment, is as follows:

“In view of the clause (iv) and (v) of section 10(2), ‘building clearly means structures and does not include site. That this is the proper meaning is also borne out by rule 8 of the Indian Income-tax Rules, 1922.

The rate of depreciation is fixed on the nature of the structure. If it is a first class substantial building, the rate is less. In other words, the first class building would depreciate at a much less rate than second class building. It would be noticed that for purely temporary erections such as wooden structures, no rate of depreciation is prescribed and instead renewals are allowed as revenue expenditure. But if the contention if the respondent was right, some rate for depreciation should have been prescribed for land under the temporary structures. Further, it would be difficult to appreciate why the land under a third class building should depreciate three times quicker than land under a first class building. The whole object of section 10 was to arrive at the assessable income of a business after allowing necessary expenditure and deductions. Depreciation is allowable as a deduction both according to accountancy principles and according to the Act, because otherwise one would not have a true picture of the real income of the business. But land does not depreciate, and if depreciation was allowed, it would give a wrong picture of the true income.

In the result, it was to be held that the cost of land was not entitled to depreciation under the schedule to Act of 1922 along with the cost of building standing thereon.”

5.2. It is also pertinent to refer to the decision of the Apex court in the case of CIT, Kolkata Vs. Hoogly Mills Co. Ltd. [2006] 157 Taxmann 347(SC). Here, the Hon’ble Supreme Court has held that since gratuity liability taken over by the assessee did not fall under any of the categories specified in Section 32, the assessee was not entitled to any depreciation on the same even if it was regarded as capital expenditure.

The relevant portion of the cited decision is reproduced below:

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In fact, depreciation cannot even be allowed on land because that too is not mentioned in section 32.”

5,3. Hence, the contention of the appellant that ‘land cost’ as mentioned in the invoice should not be construed in general parlance viz, immovable property and should be considered as expenses incurred for bringing the asset to the working condition, is not acceptable.

5.4. The appellant has placed reliance on the definition of ‘actual cost’ as per Section 43(1) of the IT Act. In this context, the appellant has cited the Apex court’s decision in the case of Challapalli Sugars Ltd. Vs. CIT (1975) 98 ITR 167(SC), It is seen that vide this decision, the Hon’ble Supreme Court has held that the interest paid before commencement of production on amount borrowed for acquisition and installation of plant and machinery can be considered to be part of the actual cost of the assets to the assessee, for the purpose of deduction on account of depreciation and development rebate.

A perusal of the Apex Court decision in the case of Challapalli Sugars Ltd. shows that it is clearly distinguishable from the facts of the appellant’s case.

To quote from the said judgment:

“While considering the question of deduction on account of depreciation and development rebate, one has to take into account the written down value. Written down value in its turn depends upon the actual cost of the assets to the assessee. The expression ‘actual cost’ has not been defined in the Act. So far as the interest after the commencement of production in respect of capital borrowed for the purposes of business is concerned, the same can be deducted under clause (iii) of sub-section (2) of section 10 of the 1922 Act.

As the expression ‘actual cost’ has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry.

The accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring-such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of construction and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.”

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The said decision was rendered when the Indian Income-tax Act 1922 was in force and at that point of time, the said Act did not contain the definition for the term ‘actual cost’. Now the statute contains a clear cut definition of actual cost i.e.

“Definition of certain terms relevant to income from profits and gains of business or profession.

(1) “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.”

5.5. The following paragraph from the Apex Court decision in the case of Challapalli Sugars Ltd. is also pertinent:

“2.5. Fixed Assets should be valued at cost and depreciation should be written off on a proper and consistent basis. Cost includes all expenditure necessary to bring the assets into existence and to put them in working condition. By way of illustration the following may be mentioned:-

i) Legal charges and stamp duties in the case of land. ii) Architect’s fee in the case of buildings. iii) Wages, salaries and installation expenses in the case of machinery, and iv) Interest on borrowings to the extent specified in paragraph 2.22.”

The court has relied upon the Statement on Auditing Practices in the absence of the definition for ‘actual cost’ in the 1922 Act.

It is clear that the Apex Court has envisaged that certain items of revenue expenditure which have been incurred by a newly started company, which is in the process of constructing and erecting its plant and before the commencement of its production can be capitalized and added to the cost of the fixed asset. The judgment clearly states, over and over again, that this rule of accountancy should be adopted for obtaining actual cost of asset in the absence of any statutory definition or other indication to the contrary.

5.6. Section 43(1) does not envisage a situation wherein the cost of an asset like land is to be added to the cost of any other asset such as plant and machinery etc. The section deals with ‘actual cost’ of a particular asset.

As far as depreciation is concerned, the assets on which depreciation shall be allowed are listed in Section 32.

Section 32 states that,

“32. (1) In respect of depreciation of –

(i) buildings, machinery, plant or furniture, being tangible assets (ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1 day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed.”

It is clear that ‘land’ is not mentioned in/is not covered by Section 32.

5.7. The case of CIT1 Kolkata Vs. Hoogly Mills Co. Ltd. [2006] 157 Taxmann 347(SC) referred in para 5.2.(supra), wherein the Hon’ble Supreme Court has categorically held that depreciation is allowable only in respect of those items specified in Section 32 of the IT Act, namely, building, machinery, plant or furniture, being tangible assets and know-how, patents, copyrights, trademarks, licenses, franchises or other business or rights of similar

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nature, being intangible assets, and that, depreciation can allowed on land because that too is not mentioned in Section 32., is squarely applicable to the facts of this case. 5.8. To conclude, following the ratio of the Supreme Court’s decisions cited earlier, viz. CIT Vs. Alps Theatre [1967] 65 ITR 377 (SC) and CIT, Kolkata Vs. Hoogly Mills Co. Ltd. [2006] 157 Taxmann 347 (SC), it is held that the appellant is not entitled for depreciation on land cost. 5.9 The Assessing Officer had disallowed the entire compensation paid for land, i.e. Rs.3,00,000/-. The Appellant claims that he has claimed Rs.2,40,000/- as expenses, viz. depreciation @ 80% on Rs.3,00,000/-. The Assessing Officer shall verify this and restrict the disallowance to the expenses i.e. depreciation of Rs.2,40,000/- claimed by the appellant.

6.0 As rightly observed the Ld.CIT(A) placing reliance on the Hon’ble

Supreme Court judgment cited supra, the land is not a depreciable asset

and not entitled for depreciation. The Co-ordinate Bench in the case of

M/s.Asian Handlooms vs. DCIT-II, Trichy has not considered the decision

of the Hon’ble Supreme Court in the case of CIT v. Alps Theatre [1967] 65

ITR 377 and the observations of the Hon’ble Supreme Court in the case of

CIT, Kolkata v. Hoogly Mills Pvt. Ltd. [2006] 157 taxmann.com 347.

Therefore, we hold that the cost of land is not eligible for depreciation and

we uphold the order of the Ld.CIT(A) and dismiss the assessee’s appeal.

In the result, the appeal of the assessee is dismissed.

Order pronounced in the Open Court on 26th May, 2017, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (!ड.एस. सु�दर $संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, 5दनांक/Dated: 26th May, 2017. TLN

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आदेश क0 .�त$ल6प अ7े6षत/Copy to: 1. अपीलाथ-/Appellant 4. आयकर आयु8त/CIT 2. ./यथ-/Respondent 5. 6वभागीय .�त�न�ध/DR 3. आयकर आयु8त (अपील)/CIT(A) 6. गाड* फाईल/GF