2012 (10) TMI 224 - AT - Income Tax

Depreciation allowed on wind energy device. Disallowance under section 14A.

The ITAT held that depreciation is allowable on the entire device capable of generating electricity using wind energy, including foundation, civil, and ... Depreciation on renewable energy device - Additional depreciation - Allowability of depreciation on foundations and civil and electrical works as part of the windmill project - Capitalised interest and disallowance to the extent borrowed funds were used to purchase land - Section 14A and Rule 8D - applicability to earlier assessment years - Proximate-cause test for disallowance under Section 14ADepreciation on renewable energy device - Additional depreciation - Allowability of depreciation on foundations and civil and electrical works as part of the windmill project - Whether depreciation and additional depreciation at the rate of 80% are allowable on foundation, civil and electrical works, installation and related payments forming part of the windmill project. - HELD THAT: - The Tribunal upheld the view that depreciation is allowable on a renewable energy device, which includes a windmill, and that the rate of 80% applies to the entire device capable of generating electricity from wind. The statute does not require bifurcation of the device into separate parts attracting different rates. Foundation, civil and electrical works are necessary for installation and form part and parcel of the windmill project; therefore depreciation and additional depreciation at 80% on such works and related payments are permissible. The CIT(A)'s reliance on High Court decisions in favour of the assessee was noted and the AO's disallowance in respect of these items was set aside. [Paras 4]The disallowance made by the AO in respect of depreciation and additional depreciation on foundation, civil and electrical works, installation and payment to GEDA is deleted.Capitalised interest and disallowance to the extent borrowed funds were used to purchase land - Whether depreciation can be claimed on capitalised interest where part of the borrowed funds may have been used for purchase of land. - HELD THAT: - The Tribunal found no express finding in the records of the AO or CIT(A) that none of the borrowed funds were utilised for purchase of land. Because depreciation should not be allowed on the portion of capitalised interest attributable to borrowed funds used to acquire land, the matter was remitted to the AO for factual verification. The AO is directed to examine whether any part of the borrowed amount was used to purchase land and, if so, to disallow depreciation on the capitalised interest to that extent. [Paras 4]Issue restored to the file of the AO for verification and appropriate disallowance of depreciation on capitalised interest to the extent attributable to funds used for land purchase.Section 14A and Rule 8D - applicability to earlier assessment years - Proximate-cause test for disallowance under Section 14A - Whether the disallowance under Section 14A (read with Rule 8D) for Rs. 90,115/- is sustainable for AY 2007-08 and whether Rule 8D applies to that year. - HELD THAT: - The Tribunal noted the assessee's contention that Rule 8D is applicable only from AY 2008-09 and relied upon authorities including the decision referred to by the assessee concerning the proximate-cause test. Given these contentions and the factual/practical questions involved, the Tribunal did not decide the issue on merits but remitted it to the AO for fresh adjudication. The AO is directed to decide the matter afresh in the light of the decision relied upon by the assessee and to afford the assessee an opportunity of being heard. [Paras 6]Issue remitted to the AO to be decided afresh with opportunity to the assessee.Final Conclusion: The Tribunal allowed the appeal of the assessee and dismissed the Revenue's challenge in part by confirming that depreciation and additional depreciation at 80% are allowable on the windmill including foundation, civil and electrical works; it remitted two limited factual/legal issues - depreciation on capitalised interest and the Section 14A disallowance - to the AO for fresh verification and decision with opportunity to the assessee. Issues:1. Disallowance of excess claim of depreciation on windmill.2. Disallowance made under section 14A r.w.s. 8D without applicability.Analysis:1. The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of excess claim of depreciation on windmill. The Revenue contended that depreciation at the rate of 80% was allowable only on the device of windmill and not on the entire cost, including civil works and electrical installation. The Revenue argued that the interest capitalized needed verification by the AO. However, the assessee argued that depreciation on civil and electrical works was necessary for the windmill installation and should be allowed. The ITAT held that depreciation is allowable on the entire device capable of generating electricity using wind energy, including foundation, civil, and electrical works. The ITAT dismissed the Revenue's appeal regarding depreciation and additional depreciation on these works but directed the AO to verify the utilization of borrowed amount for land purchase concerning depreciation on capitalized interest.2. The assessee's CO challenged the disallowance made under section 14A r.w.s. 8D without applicability for the assessment year 2007-2008. The CO argued that no interest-bearing funds were used for earning exempt income and cited legal precedents. The ITAT decided to restore this issue to the AO for fresh consideration in light of the legal position cited by the assessee and to provide a due opportunity for the assessee to be heard. Consequently, the Revenue's appeal was partly allowed for statistical purposes, and the CO of the assessee was allowed for statistical purposes.