Tax Tribunal allows windmill depreciation claim, permits set-off from rectified spirit unit, overturns interest disallowance, remands prior period expenditure.

The Tribunal allowed the depreciation claim on windmills, considering the transaction genuine despite initial disallowance. The set-off of losses from the rectified spirit unit was permitted based on the demerger's 'going concern' status. Disallowance of interest on loans was overturned due to sufficient interest-free funds covering the loans. The disallowance of prior period expenditure was remanded for further examination. The appeal for AY 2006-07 was fully allowed, while for AY 2007-08, it was partially allowed.

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Issues Involved:
1. Disallowance of depreciation on Wind Mills.
2. Disallowance of set-off of brought forward loss of rectified spirit unit.
3. Disallowance of interest on loans.
4. Disallowance of prior period expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Wind Mills:

The assessee claimed depreciation of Rs. 9,73,54,400/- on 37 wind mills purchased from M/s Indowind Energy Limited (IEL) in March 2006. The AO disallowed the claim, citing lack of evidence such as bills/invoices during a survey, contradictions in statements of the assessee's personnel, and delayed notification to end-users about the transfer. The CIT (A) upheld the disallowance, noting contradictions in the statements of the MD and Project Consultant, discrepancies in the Directors' and auditors' reports, and the timing of tripartite agreements.

The Tribunal observed that:
- WIL sold 28 WEGs to IEL on 15.3.2006, accounted for in its books for the year-ended 31.3.2006.
- IEL confirmed the sale to the assessee on 15th and 24th March 2006.
- The income from power generated by the WEGs was accounted for by the assessee from 15th to 31st March 2006.
- The survey conducted before the end of the financial year indicated the authorities were aware of the transaction.

The Tribunal concluded that the transaction was not a sham and allowed the depreciation claim.

2. Disallowance of Set-off of Brought Forward Loss of Rectified Spirit Unit:

The AO disallowed the set-off of Rs. 7 crores of losses from the rectified spirit unit of MOL, stating it was not a 'going concern' as per s. 2(19AA) of the Act. The CIT (A) upheld this, terming the unit a 'dead concern'.

The Tribunal noted:
- The scheme of demerger was approved by the High Courts of Andhra Pradesh and Karnataka.
- The demerger was on a 'going concern' basis, transferring assets, liabilities, employees, etc., to the assessee.

The Tribunal referenced the Supreme Court's ruling in Marshall Sons & Co (India) Ltd v. ITO, which stated that once demerger is approved, it relates back to the appointed date. The Tribunal concluded that the assessee was eligible for the set-off under s. 72A(4) of the Act.

3. Disallowance of Interest on Loans:

The AO disallowed Rs. 10,97,85,319/- of interest, arguing that the assessee gave interest-free loans to related concerns while paying interest on borrowed funds. The CIT (A) upheld the disallowance, stating the loans came from a mixed kitty of funds and lacked commercial expediency.

The Tribunal found:
- The assessee had sufficient non-interest bearing funds (Rs. 170.93 crores) to cover the interest-free loans (Rs. 117.39 crores).
- The interest-bearing loans were for specific purposes like working capital and vehicle loans.

Citing the Bombay High Court's ruling in CIT v. Reliance Utilities & Power Ltd, the Tribunal held that if interest-free funds are sufficient to cover investments, the presumption is that investments are from those funds. The Tribunal deleted the disallowance.

4. Disallowance of Prior Period Expenditure:

The AO disallowed Rs. 10,58,536/- of prior period expenses, stating the assessee, following the mercantile system, should have made provisions for these expenses. The CIT (A) upheld the disallowance.

The Tribunal noted the assessee's justification for each expense and found that the AO and CIT (A) did not properly analyze the issue. The Tribunal remanded the matter to the AO for fresh examination, directing the AO to consider the details provided by the assessee.

Conclusion:

- The appeal for AY 2006-07 was allowed.
- The appeal for AY 2007-08 was partly allowed.

Order pronounced in the Open Court on 22nd November, 2013.

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