Additional depreciation and section 14A disallowance principles clarified for windmill income, with TDS credit subject to verification.

Additional depreciation under section 32(1)(iia) was stated to be available for plant and machinery installed in a windmill project without any requirement of operational connectivity with the assessee's existing manufacturing business, so long as the statutory conditions are met; the benefit was allowed on that basis. On section 14A read with rule 8D, the discussion noted that a mechanical computation was not justified where the assessee had made a voluntary disallowance and the exempt income consisted mainly of tax-free bonds, dividend, PPF interest and long-term capital gains; the disallowance was therefore confined to the voluntary amount. For short TDS credit, the Assessing Officer was directed to verify the supporting documents and grant credit according to law.

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Issues: (i) Whether additional depreciation was allowable on plant and machinery installed in a windmill project under section 32(1)(iia); (ii) Whether the disallowance under section 14A read with rule 8D was sustainable and, if not, to what extent it should be restricted; (iii) Whether the assessee was entitled to direction for grant of short credit of TDS.

Issue (i): Whether additional depreciation was allowable on plant and machinery installed in a windmill project under section 32(1)(iia).

Analysis: The controversy turned on whether the windmill activity had to be connected with the assessee's existing manufacturing business for claiming additional depreciation. The provision, as interpreted by the binding decisions relied upon, does not require operational connectivity between the new plant and the earlier manufacturing activity. A windmill set up as a new plant and machinery is eligible where the statutory conditions are otherwise met, and the later amendment extending the benefit to generation and distribution of power did not control the year under appeal.

Conclusion: The assessee was entitled to additional depreciation and the disallowance was deleted.

Issue (ii): Whether the disallowance under section 14A read with rule 8D was sustainable and, if not, to what extent it should be restricted.

Analysis: The disallowance had been computed mechanically under rule 8D(2)(iii), though the assessee had made a voluntary disallowance and the exempt income arose mainly from tax-free bonds, dividend, PPF interest, and long-term capital gains. The Tribunal followed its earlier decision in the assessee's own case, and also considered the factual position for the year under appeal, including the voluntary disallowance already offered by the assessee. On that basis, the larger disallowance computed by the Assessing Officer was not justified.

Conclusion: The disallowance under section 14A was restricted to the voluntary disallowance offered by the assessee, and the addition was deleted to that extent.

Issue (iii): Whether the assessee was entitled to direction for grant of short credit of TDS.

Analysis: The assessee had already sought rectification and the credit claim required verification of the supporting evidence by the Assessing Officer. The appropriate course was to direct verification and grant of credit in accordance with law after examining the documents.

Conclusion: The Assessing Officer was directed to verify the TDS claim and allow credit in accordance with law.

Final Conclusion: The assessee succeeded on all substantial grounds, with the TDS issue left for verification and consequential credit by the Assessing Officer.

Ratio Decidendi: Additional depreciation under section 32(1)(iia) is not confined to plant and machinery having operational connectivity with the assessee's existing manufacturing activity, and a mechanical application of rule 8D for section 14A disallowance is impermissible where the facts justify a restricted disallowance.

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