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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: Shri K. Gopal, AR
Date of hearing .. 22-09-2016 .. Date of pronouncement 22 -09 - 2016 O R D E R PER MAHAVIR SINGH, JM:
These two cross appeals, one by the assessee in and the other by the Revenue in CIT (Appeals)-19, Mumbai in appeal No.CIT (A)-19/Rg.17/T-56/2009- 10 dated 03-09-2012. Assessment was framed by the ACIT, Range-17(3), Mumbai u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’) for assessment year 2007-08 vide his order dated 29th December, 2009.
The first issue in the assessee’s appeal in is as regards to whether the contribution for common infrastructure facility in power evacuation is revenue expenditure or alternatively, the expenditure is to be 2 & 7063/Mum/2012 treated as capital expenditure under intangible assets as part of Windmill. For this, the assessee has raised the following grounds No.1 and 2:- “The learned CIT (Appeals) -19 erred in,
1. Confirming addition to total income of Rs.37,50,000/- out of contribution for common infrastructure facility for power evaculation and not considering it as revenue expenditure, alternatively not treating the said expenditure as part of windmill, alternatively not treating the said expenditure as capital expenditure covered under intangible asset’,
2. Not admitting the following additional grounds of appeal filed before CIT (A)-19 during the course of hearing. Claiming the expenditure of Rs.37,50,000/- towards contribution for common infrastructure facility for power evaculation as revenue expenditure. Alternatively, claiming the expenditure of Rs.37,50,000/- towards contribution for common infrastructure facility as part of windmill cost. Claiming additional depreciation u/s 32(1) (iia) on the cost of windmill.
3. At the outset, the learned Counsel for the assessee first of all taken us through Para 7 of the CIT (A)’s order wherein it was explained that the above grounds were raised before the CIT (A) for the first time. It was explained before the CIT (A) that the payment of Rs.37.50 lacs is made in due course of business of generation of power from Windmill and is for the purpose of business and, therefore, allowable u/s 37 (1) of the Act. He also explained that the assessee was under bona fide belief that this payment resulted into an intangible asset eligible for depreciation but it was claimed as revenue expenditure u/s 37(1) of the Act. It was claimed that additional depreciation of Windmill has been claimed u/s 32(1) (iii) of the Act since electricity generation amounts to manufacturing of articles or things and all these facts are available in the records of the AO and it does not require any fresh investigation into the facts. According to the learned Counsel, the CIT (A) has not admitted the additional grounds raised by giving following findings in Para 9.1 to 9.4 as under:- “9.1 From the judgment of Supreme Court it is evident that an additional ground that has arisen after the appeal has been filed, should normally be admitted by the appellate authority unless adjudication of such additional ground requires fresh investigation into facts. Such ground may arise subsequent to filing of an appeal
3 & 7063/Mum/2012 either by way of an amendment to the statute or by way of judicial pronouncement which is applicable in the case of the appellant. It is also settled law that unless the additional grounds raised during appeal has a arisen solely due to the developments after filing of appeals and it was not available to the appellant at the time appeal was filed, such additional ground should not be admitted. 9.2 The appellant has not shown any reason or material on the basis of which the assessee was of the bonafide belief that the payment of Rs.37,50,000/- brought into existence and intangible asset eligible for depreciation and subsequent to filing of appeal what circumstances or law have changed that led the assessee to believe that said payment of Rs.37,50,000/- is a revenue expenditure eligible for deduction u/sec 37(1). Similarly, the learned A/R has also not explained why the depreciation u/s 32(1) (iia) was not claimed in the return or during assessment or even at the time of filing of appeal and why it has been claimed only as an additional ground. No explanation has been given to substantiate that the payment of Rs.37,50,000/-constituted part of the Windmill and eligible for depreciation as Windmill. Also whether such intangible is a part of Wind Mill, requires fresh investigation into facts. Otherwise also it has already been held that no cost of power evacuation facility is to be borne by the appellant. 9.3 On the facts of the case it is evident that all these grounds were available to the assessee at the time of filing of t he return itself. There is no development neither by way of any amendment to statute nor by way of a judicial pronouncement after filing of the return and more significantly after filing of the appeal. 9.4 Therefore, applying the judgment of the Supreme Court in Jute Corporation of India (supra) as explained by Supreme Court in NTPC (supra) and also explained by Bombay High Court – Ahmedabad Electricity (supra) it cannot be said that the Additional grounds could not have been raised at the stage when the return was filed or when the assessment was passed or that the ground became available only after filing of appeal on account of change of circumstances or law. No change of circumstances or law subsequent to filing of appeal has been shown. Therefore, it cannot be said that the additional grounds so raised are bonafide and that the same could not have been raised earlier for good reasons. In fact, no cogent or good reason has been shown why all these grounds could not be raised earlier. Hence the condition for admission of additional grounds as laid down by Supreme Court in Jute Corporation (supra), NTPC (supra) and Bombay High Court in case of Ahmedabad Electricity (supra) are not fulfilled in this case. Hence these additional grounds are not admitted”.
4. After hearing the rival contentions, we find that the assessee has made claim of payment of Rs.37.50 lacs in the course of business of generation of 4 & 7063/Mum/2012 power from Windmill and claimed the same as business expenditure u/s 37(1) of the Act. We have gone through the assessment order and noticed that at page 2 of the assessment order in Para 4.1 the assessee has made a claim regarding payment in respect to infrastructure facility of common power evacuation of Rs.37.50 lacs to Suzlon Energy Ltd. We find that these facts are very much available on record of the AO as well as the CIT (A). The only issue which is to be considered is as to whether these facts need verification and the issue is to be set aside to the file of the AO. Hence, we admit the additional grounds of appeal and set aside the issue to the file of the AO for deciding the issue after allowing reasonable opportunity of being heard to the assessee. This issue of the assessee’s appeal is allowed for statistical purpose.
5. The next common issue in both the appeals i.e. in the appeal of the assessee and in the Revenue is as regards to depreciation on civil work foundation and deprecation on erection of HT lines. For this, the assessee has raised the following ground No.3:- “The learned CIT (Appeals)-19 erred in 3. Confirming the depreciation on erection & HT lines as well as on erection assembly @15% i.e. the rate applicable to P & M and not allowing the depreciation on the same @80% i.e. the rate applicable to windmill (renewed energy devices)”. For this, the Revenue has raised the following grounds No.1 and 2:- “1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in allowing higher rate of depreciation on civil work for foundation without appreciating the fact that the functional test for allowability of depreciation is durability of a particular asset with respect to wear and tear and therefore depreciation was correctly not allowed by the AO on higher rate on cost incurred on foundation work.
2. On the facts and circumstances of the case and in law, the learned CIT (A) erred in allowing higher rate of depreciation on civil work for foundation by following the order of the honorable ITAT, Jodhpur in the case of Delhi Rajasthan Transport Co. without appreciating the fact that the said order is not binding in Mumbai and is ambiguous as the honorable ITATs in one part of its said order held that foundation of the windmill is part and parcel of the windmill and eligible for depreciation at higher rate, where as in other part is also held that civil work is not an integral part of windmill and is not eligible for higher depreciation”.
Brief facts leading to this issue are that the assessee has claimed the cost of wind mills as under:- Cost of Windmill 4,99,13,080/- Civil Work for foundation 33,64,627/- Erection of HT Line 31,41,435/- Erection assembly 12,10,000/- The assessee before the AO claimed the costs of foundation erection on HT line erection of assembly are integrated part of the Windmill and depreciation on these items is admissible at the rate applicable to Windmill. The assessee before the AO referred to Clause XIII of Appendix – I of IT Rules and claimed that higher depreciation in case of Windmill is allowable due to high propensity of moving parts to wear & tears. According to the AO same high propensity and wear and tear is not applicable to Foundation or Switchgear which is used for generation at evacuation of power etc. Accordingly, he disallowed higher disallowance and restricted the depreciation to normal rates. Aggrieved, the assessee preferred appeal before the CIT (A) who allowed depreciation at higher rate of Civil Work whereas he restricted the depreciation at normal rate of HT Lines and Switchgear etc. by observing in Para 4.4, 4.5 and 4.6 as under:- “4.4 In Para 13 of the order Hon’ble ITAT has held that foundation of the Windmill is part and parcel of the Windmill and eligible for depreciation at higher rate. The ITAT has also held that civil work is not an integral part of Windmill and is not eligible for higher depreciation. Para 13 & 14 of the ITAT order reads as under: “We, therefore, taking into consideration the facts and circumstances of the case and also following the above case laws we came to conclusions that the foundation of the wind mill is amounting to part and parcel of the wind mill and it is a plant and machinery and accordingly, the assessee is eligible for higher rate of depreciation which was claimed. As far as civil work is concerned, we find that I t is not an integral part of the Wind Mill and he is not eligible for higher depreciation. In view of the above observations, we set aside the order passed by the Ld. CIT (A) and remit the issue matter back to the file of the Assessing Officer and direct the AO to allow the higher depreciation clam of the assessee in respect of the foundation of the wind mill. In so far as the other allied works are concerned normal rate has to be applied and this 6 & 7063/Mum/2012 ground of appeal raised by the assessee is allowed for statistical purposes”. 4.5 Applying the said order of the ITAT, Jodhpur it is hereby held that foundation is an integral part of the Windmill and eligible for depreciation at higher rate. As far as the cost of HT lines and Switchgear etc. is concerned it cannot be regarded as integral part of Windmill because (i) It is installed separately from the Windmill and used for transfer of power generated by the Windmill to the grid. (ii) The Windmill gets worn out fast due to rotary components and can be replaced independently of the Switchgear and HT Lines. (iii) The same Switchgear and HT Lines can be used for new Windmill or different Windmill. 4.6 Hence, the above order of the ITAT regarding the other civil work, or allied works, wherein it has been held to be not an integral part of the Windmill and not eligible for depreciation at higher rate, is applicable in this case. Applying the same, it is hereby held that Switchgear and HT Lines are not integral part of the Windmill and hence they are not eligible for depreciation at higher rates., but they are eligible for depreciation at normal rates. In the result this ground is allowed in part”. Aggrieved, now the assessee is in second appeal against allowance of normal rate on HT Lines and Switchgear and the Revenue is in second appeal against allowance of higher depreciation on civil works.
We have heard the rival contentions and gone through the facts of the case. Before us, the learned Counsel for the assessee filed copy of the judgment of the Hon’ble Punjab & Haryana High Court in the case of CIT-I, Ludhiana Vs M/s. Eastman Impex of 2013 Order dated 18-12-2014 wherein exactly identical issue of higher depreciation on installation of electrical lines for transmission and metering of Windmill is treated as allowed by observing as under:- “We have perused the opinion recorded by the Rajasthan High Court and find no reason to record an opinion to the contrary. A wind mill, which is admittedly a source of renewable energy, cannot possibly function without power evacuation infrastructure and, therefore, to hold that it is not integral to a wind mill would be travestying of facts and justice. It would be necessary to clarify that we are not dealing with an ordinary device, where transmission lines and electricity generation devices are involved but a wind mill, which obviously cannot supply electricity without power 7 & 7063/Mum/2012 evacuation infrastructure as integral to its very functioning and user. Consequently, we answer question of law against the revenue and dismiss the appeals accordingly”. Similar view was taken by the Hon’ble Rajasthan High Court in the case of CIT, Udaipur Vs K. K. Enterprises [2014] 227 Taxman 181 (Rajasthan) (MAG.) wherein the issue was decided in favour of the assessee by observing as under:- “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 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, highly specialized. Thus, such civil construction and electric fittings 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 fittings, 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”.
7. We are in absolute agreement with the reasonings given by the Hon’ble Gujarat High Court. We accept the same and for the same reasons these appeals are dismissed”. In view of the above precedence of the Hon’ble Punjab and Haryana High Court and the Hon’ble Rajasthan High Court and the facts of the present case, we are of the considered opinion that the civil work foundation, erection of HT Lines and Switchgear etc. are integral part of Windmill and it cannot be viewed separately from Plant & Machinery. Accordingly, we are in agreement with the arguments of the learned Counsel for the assessee that the civil work for foundation is integral part of the Plant & Machinery and it cannot be viewed separately from Plant & Machinery for which foundation is laid. Similarly, HT Lines and Switchgear etc. are also integral part of Windmill and hence, eligible for higher
8 & 7063/Mum/2012 rate of depreciation i.e. rate applicable on Windmill. We direct the AO accordingly. This common issue in the assessee’s appeal and that of the Revenue is decided in favour of the assessee. This issue of Revenue’s appeal stands dismissed and that of the assessee stands allowed.
The next issue in the appeal of the assessee is against the order of the CIT (A) in not adjusting the opening WDV of Windmill block of assets for granting of correct depreciation for assessment year 2007-08.
At the outset, the learned Counsel for the assessee stated that he has instruction from the assessee not to press this issue. Hence, this issue is dismissed as not pressed.
The next issue of the appeal of the assessee is against the order of the CIT (A) confirming the addition of interest expenses disallowed by the AO at Rs.19,84,507/-.
Brief facts leading to this issue are that the AO during the course of assessment proceedings disallowed interest of Rs.19,84,507/- for the reason that the assessee has used the borrowed funds for purchase and installation of Windmills, which is a new business of the assessee yet to come into existence. According to the AO, payment of Rs.5 Crores for Windmill was made from the loan taken from Shri V. R. Venkatachalam. This fact has not been disputed by the assessee that payment for Windmill has been made from the loan taken from Shri V. R. Venkatachalam of Rs.5 Crores. The AO also noted that the payment for Windmill has been made by way of borrowed funds from bank which is also interest bearing. According to the AO, the assessee has used borrowed funds for new business and hence, interest paid has to be disallowed on proportionate basis. Secondly, the AO was of the view that interest paid to the partners also has to be treated as cost of funds for computing disallowance. The CIT (A) also confirmed the disallowance of interest by holding that the interest paid on borrowed capital for acquisition of asset for extension of existing business for the period from the date of borrowing of the capital till the date of the assessed put to
We have heard the rival submissions and also gone through the facts of the case. We find that now, the assessee before us argued that the assessee was already in the business of generation of power through Windmill. This fact has not been disputed by the Revenue before us. The assessee explained that this business activity has been expanded and one more Windmill has been installed. To prove this point, the learned Counsel for the assessee stated that in earlier years also income from Windmill business i.e. power generation was there in the accounts. Therefore, he argued that the existing business of power generation has been accepted and it is not a new business at all. Further, as regards the interest paid to the partners, he argued that the interest to partners is paid as per the Partnership Deed within the limit prescribed u/s 40(b) of the Act and, hence, there is no question of disallowance of interest on that count. We find that there is no dispute that the assessee had a Windmill installed in earlier year also and was producing power. Installation of Windmill in this year is only expansion of existing business and not a new business. It is also a fact that the loan taken from Shri V. R. Venketachalam of Rs.5 Crores has been used for purchase of Windmill for expansion of business and hence, allowable as business expenditure u/s 36(1) (iii) of the Act. We are also of the view that the assessee has made payment to partners as per the Partnership Deed and within the limit prescribed u/s 40(b) of the Act. Hence, we delete the addition and allow this issue of the assessee’s appeal.
In the result, the appeal of the assessee is partly allowed for statistical purposes and the appeal of the Revenue is dismissed. Order pronounced in the open court on 22-09-2016.