Tribunal grants partial appeal on depreciation and capital gains exclusion, dismisses department's appeal, and deletes penalty.

The Tribunal allowed the assessee's appeal partially, directing the AO to permit 100% depreciation on the windmills' cost and exclude capital gains from book profits for section 115JB purposes. The Tribunal dismissed the department's appeal and rejected the disallowance of hire charges as not pressed. The penalty under section 271(1)(c) was deleted due to the Tribunal's decisions on depreciation and capital gains.

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Issues Involved:
1. Allowance of depreciation on windmills acquired on hire purchase basis.
2. Disallowance of hire charges incurred on acquisition of windmills.
3. Set-off of carried forward depreciation against long-term capital gains.
4. Calculation of book profits under section 115JB.
5. Levy of penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Allowance of Depreciation on Windmills Acquired on Hire Purchase Basis:
The primary issue involved was whether the assessee was entitled to claim depreciation on windmills acquired under a hire purchase agreement. The assessee argued that the transaction was genuine and supported by CBDT's Circular No. 9, dated 23rd March, 1943. The Assessing Officer (AO) disallowed the depreciation, suspecting the hire purchase agreement to be a device to avoid tax. The CIT(A) partially allowed the depreciation but recalculated the cost of the windmills, invoking Explanations 3 and 4A of section 43(1).

Upon review, the Tribunal found no basis for doubting the genuineness of the hire purchase agreement. The Tribunal held that the actual cost of the windmills was Rs. 5.05 crores, supported by valuation reports and insurance coverage. The Tribunal concluded that the assessee was entitled to 100% depreciation on the cost of the windmills, as the hire purchase agreement was genuine and covered by the Board's Circular No. 9. The Tribunal directed the AO to allow depreciation accordingly.

2. Disallowance of Hire Charges Incurred on Acquisition of Windmills:
The assessee raised a ground regarding the disallowance of hire charges incurred on the acquisition of windmills. However, this ground was not pressed by the assessee's counsel during the hearing, and thus, it was rejected as not pressed.

3. Set-off of Carried Forward Depreciation Against Long-term Capital Gains:
The assessee contested the CIT(A)'s decision that carried forward depreciation from earlier years could not be set off against the long-term capital gains of the current year. The Tribunal found that the AO had already set off the brought forward depreciation against the business income for the year, in line with section 32(2). Therefore, the Tribunal confirmed the CIT(A)'s order on this issue.

4. Calculation of Book Profits Under Section 115JB:
The assessee objected to the addition of capital gains to the book profits for the purpose of section 115JB. The Tribunal noted that this issue was covered in favor of the assessee by multiple decisions of various ITAT Benches, which consistently held that book profits could not be increased by adding capital gains. Consequently, the Tribunal directed the AO to exclude capital gains from the book profits for section 115JB purposes.

5. Levy of Penalty Under Section 271(1)(c):
The penalty under section 271(1)(c) was based on the disallowance of depreciation on windmills and the addition of capital gains to the book profits. Since the Tribunal had already deleted these additions, the basis for the penalty no longer existed. Therefore, the Tribunal directed the AO to delete the penalty.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing the AO to allow 100% depreciation on the cost of the windmills and to exclude capital gains from the book profits for section 115JB purposes. The Tribunal dismissed the department's appeal and rejected the ground regarding the disallowance of hire charges as not pressed. The penalty under section 271(1)(c) was also deleted.

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