Tribunal upholds disallowance of depreciation & interest deductions for windmills and new business investment

The Tribunal upheld the disallowance of depreciation claimed on windmills due to charges for land development not being part of the windmill's machinery. Additionally, the disallowance of interest on borrowed funds for investment in a new business line was upheld as the business had not commenced operations, and interest can only be allowed for an existing business. The appeal by the assessee was dismissed on both grounds, with the order pronounced on July 18, 2014.

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Issues Involved:
1. Disallowance of depreciation claimed on Wind Mill.
2. Disallowance of interest on investment expenditure incurred in a new line of business.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claimed on Wind Mill:

The assessee claimed depreciation on windmills, including infrastructure development charges of Rs. 96.90 lakhs paid to M/s Shubh Reality (South) Pvt Ltd, which was added to the cost of windmills. The Assessing Officer (AO) disallowed this depreciation, arguing that these charges were for land development and should be capitalized with the cost of land, not the windmill. The CIT(A) upheld this disallowance, noting that the charges paid to Tamil Nadu Electricity Board (TNEB) were administrative in nature, related to obtaining permission for land use, and not for the actual infrastructure development of the windmill. The CIT(A) emphasized that these charges were for ensuring unhindered land use and did not qualify as part of the wind turbine machinery. Consequently, the depreciation claimed on this amount was disallowed and added back to the assessee's income.

The Tribunal agreed with the CIT(A), stating that the payments made to TNEB were administrative fees for land use, NOC, and registration charges, and thus could not be considered part of the windmill's plant and machinery. The Tribunal confirmed that the lower authorities rightly treated these payments as part of the land cost and denied depreciation on the Rs. 96.90 lakhs. The ground taken by the assessee on this issue was dismissed.

2. Disallowance of Interest on Investment Expenditure Incurred in a New Line of Business:

The AO noticed that the assessee borrowed funds for investment in a new line of business (FM Radio), which had not commenced operations. The AO held that the interest on these borrowed funds should be capitalized and disallowed interest expenditure of Rs. 83.21 lakhs. The CIT(A) upheld this disallowance, citing Section 36(1)(iii) of the Income Tax Act, which mandates capitalization of interest on borrowed funds for the acquisition of an asset for the extension of existing business until the asset is put to use.

The assessee argued that the investment was made from its own funds and that the interest should not be disallowed. However, the Tribunal found that the assessee failed to establish a clear nexus between its own funds and the investment. The Tribunal noted that the assessee's balance sheet showed significant borrowed funds, and the investment in the new business was made out of these borrowed funds. The Tribunal emphasized that interest expenditure is allowable only if incurred in respect of an existing business. Since the FM Radio business had not commenced operations, the interest could not be allowed as a deduction. The Tribunal upheld the CIT(A)'s decision to disallow the proportionate interest expenditure related to the investment in the new line of business. The ground taken by the assessee on this issue was dismissed.

Conclusion:

The appeal filed by the assessee was dismissed on both grounds. The Tribunal upheld the disallowance of depreciation on the windmill and the disallowance of interest on investment expenditure incurred in the new line of business. The order was pronounced in the open court on July 18, 2014.

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