ITAT: Deduction Calculation Clarified for Section 80IA, Disallowance under Section 40(a)(ia) Overturned

The ITAT concluded that the deduction under Section 80IA should be computed after setting off the depreciation and expenses related to each WEG unit. The AO was directed to recompute the deduction based on the profit from each unit and allocate the depreciation accordingly. The disallowance under Section 40(a)(ia) was deleted, as the payments were for a service contract, not rent. The appeal of the revenue was partly allowed.

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Issues Involved:
1. Deduction under Section 80IA of the Income-tax Act, 1961.
2. Allocation of depreciation and expenses.
3. Eligibility period for claiming deduction under Section 80IA.
4. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961.

Detailed Analysis:

1. Deduction under Section 80IA of the Income-tax Act, 1961:
The primary issue revolves around the eligibility of the assessee for deduction under Section 80IA, which pertains to profits and gains derived from an industrial undertaking engaged in the business of generating power. The assessee claimed a deduction of Rs. 87,35,282 for six units of Wind Electric Generators (WEGs). The Assessing Officer (AO) denied the deduction, arguing that the ten-year eligibility period had lapsed, as the first claim was made in the assessment year 1996-97. However, the assessee contended that each WEG is a separate unit, and the deduction should be computed for each unit independently.

2. Allocation of Depreciation and Expenses:
The AO computed the unabsorbed depreciation and current year depreciation for two units, totaling Rs. 66,10,294, and proportionate expenses of Rs. 8,42,718. The AO aggregated these amounts and set them off against the power generation income, concluding that the income was insufficient to claim the deduction. The CIT(A) directed that depreciation should be allocated proportionately at 0.2%, similar to the maintenance expenses. The ITAT upheld the AO's view that depreciation and expenses must be deducted from the gross receipts to compute the eligible profit, as per Sections 80IA(1), (4), and (5).

3. Eligibility Period for Claiming Deduction under Section 80IA:
The AO argued that the ten-year period for claiming deduction had expired. However, the ITAT noted that each WEG is a separate unit, and the deduction should be computed independently for each unit. The ITAT referenced the case of Dalmia Cement, where it was held that each WEG is a "stand-alone" unit capable of generating electrical energy independently. The ITAT directed the AO to recompute the deduction based on the profit from each unit and allocate the depreciation accordingly.

4. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961:
The AO disallowed Rs. 123,35,991 under Section 40(a)(ia), arguing that the assessee failed to deduct TDS at 20% for crane hire charges, which should be considered rent under Section 194I. The assessee contended that it was a service contract, not a hire of machinery. The CIT(A) agreed with the assessee, stating that the cranes were operated by the contractor's staff, and thus, it was a service contract. The ITAT upheld the CIT(A)'s decision, referencing a similar case where it was held that hiring transportation services falls under Section 194C, not Section 194I.

Conclusion:
The ITAT concluded that the deduction under Section 80IA should be computed after setting off the depreciation and expenses related to each WEG unit. The AO was directed to recompute the deduction based on the profit from each unit and allocate the depreciation accordingly. The disallowance under Section 40(a)(ia) was deleted, as the payments were for a service contract, not rent. The appeal of the revenue was partly allowed.

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