Windmill depreciation, foreign commission, and block-of-assets computation shaped the tax treatment of business expenditure and gains.

Depreciation on a newly acquired windmill required proof of commissioning and actual use; a mere trial-run authorisation was insufficient, so the claim was denied. For depreciable assets in a block, the year-end block mechanism governed computation under section 50, and the sale of the old windmill was not treated as short-term capital gain merely by reference to the sale date. Commission paid to foreign agents for procuring export orders abroad did not attract withholding tax where no services were rendered in India, so disallowance under section 40(a)(i) was unwarranted. Expenditure incurred up to commissioning, including development rights, erection, commissioning, and transport, formed part of actual cost eligible for windmill depreciation. Foreign travel expense for a partner's spouse was allowed only in part, and the damaged-goods claim was remanded for fresh examination.

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Issues: (i) whether depreciation on the newly acquired windmill was allowable where commissioning and user were not proved; (ii) whether the sale of the old windmill gave rise to short-term capital gain or the gain had to be computed with reference to the year-end block of assets; (iii) whether commission paid to foreign agents for procuring export orders attracted tax deduction at source and disallowance; (iv) whether the claim relating to damaged goods was allowable, and in what character; (v) whether expenditure incurred up to commissioning formed part of the cost eligible for depreciation at the windmill rate; and (vi) whether foreign travel expenditure of a partner's spouse was allowable in full.

Issue (i): Whether depreciation on the newly acquired windmill was allowable where commissioning and user were not proved.

Analysis: Depreciation under section 32(1) requires ownership and actual use. A mere ready-to-use state is insufficient for a first-time asset; passive user applies only where the asset was already deployed and only temporarily remained idle. The material showed only a temporary authorisation for trial run and a commissioning certificate stating that the machines were under trial run, with no compliance report, no proof of removal of defects, and no evidence of generation of electricity or successful trial production by the relevant date. The windmill was therefore not shown to have been commissioned or used.

Conclusion: The depreciation claim on the new windmill was rejected, in favour of Revenue.

Issue (ii): Whether the sale of the old windmill gave rise to short-term capital gain or the gain had to be computed with reference to the year-end block of assets.

Analysis: For depreciable assets forming part of a block, section 50 operates with the year-end block position and the written down value as relevant to the computation. Since the newly acquired windmill did not qualify for depreciation in the year, it could not enter the block for that year and remained capital work-in-progress. The transfer of the old windmill therefore had to be tested on the block mechanism, while the character of the gain depended on the holding period of the asset transferred.

Conclusion: The year-end block approach applied, and the gain was not to be treated as short-term capital gain merely because of the date of sale; the issue was decided in favour of Assessee on the computational method.

Issue (iii): Whether commission paid to foreign agents for procuring export orders attracted tax deduction at source and disallowance.

Analysis: Income of non-resident agents depends on a business connection and income arising in India. The commission was for solicitation of export orders abroad, with no activity performed in India and no permanent establishment in India. The payment was not for technical services and did not fall within the charging or withholding framework so as to require deduction under section 195. Consequently, disallowance under section 40(a)(i) was unwarranted.

Conclusion: The commission was not liable to TDS disallowance, in favour of Assessee.

Issue (iv): Whether the claim relating to damaged goods was allowable, and in what character.

Analysis: The original claim was not supported by reliable evidence, but the explanation before the Tribunal showed that the amount was in substance a reduction in sale consideration granted to foreign buyers as a matter of trade. In view of this altered factual character, the proper course was to restore the matter for fresh examination from a businessman's perspective and to determine the correct allowance under the applicable provision on proved facts.

Conclusion: The matter was remanded for fresh adjudication, partly in favour of Assessee.

Issue (v): Whether expenditure incurred up to commissioning formed part of the cost eligible for depreciation at the windmill rate.

Analysis: Expenditure incurred to bring a capital asset to the condition and location of its intended use forms part of its actual cost. Development rights, erection and commissioning charges, and transportation expenditure were all part of the cost incurred up to commissioning and could not be segregated for a lower rate merely because they were distinct heads of expense.

Conclusion: Depreciation at the windmill rate was allowable on these items, in favour of Assessee.

Issue (vi): Whether foreign travel expenditure of a partner's spouse was allowable in full.

Analysis: The spouse was neither a partner nor an employee, but the nature of the business and the travel supported some business nexus. At the same time, the evidence did not establish that the entire expenditure was incurred wholly and exclusively for business purposes. A partial allowance was therefore appropriate.

Conclusion: Fifty per cent of the foreign travel expenditure was allowed, partly in favour of Assessee.

Final Conclusion: The Revenue succeeded on disallowance of depreciation on the windmill, while the assessee obtained relief on the cost components, foreign commission issue, and part of the foreign travel claim, and the damaged-goods issue was sent back for fresh consideration.

Ratio Decidendi: For a newly acquired depreciable asset, actual commissioning and user must be proved before depreciation can be claimed, and in the case of a block of assets the year-end block mechanism governs computation under the depreciation and capital gains provisions.

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