Interest on purchase tax not deductible until paid under Income Tax Act, co-gen plant depreciation allowed

The appeal regarding interest on purchase tax was dismissed, confirming that such interest is deductible only upon actual payment under section 43B of the Income Tax Act. However, the appeal concerning depreciation on the co-generation plant was allowed. The tribunal directed the assessing officer to grant higher depreciation on specific components integral to the co-generation system and treat the sub-station tower line expenditure as revenue expenditure. The final judgment partially allowed the assessee's appeal with specific instructions to the assessing officer, pronounced on 20th December 2017.

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Issues Involved:
1. Interest on purchase tax.
2. Depreciation on co-generation plant.

Issue-wise Detailed Analysis:

1. Interest on Purchase Tax:
- The assessing officer (AO) identified that the assessee had debited Rs. 9,51,162/- as interest payable on purchase tax. The AO concluded that this interest falls under the provisions of section 43B of the Income Tax Act, which allows deductions on an actual payment basis. The AO referenced the Supreme Court decision in Mahalakshmi Sugar Mills Co. Vs. CIT (123 ITR 429) to support the disallowance and added the amount back to the income.
- The assessee appealed to the Commissioner of Income-Tax (Appeals) [CIT(A)], who upheld the AO's decision. The CIT(A) reasoned that the interest liability on unpaid purchase tax is akin to a tax and must be allowed as a deduction only upon actual payment, as per section 43B. The CIT(A) emphasized that allowing the deduction without payment would defeat the legislative purpose of section 43B.
- During the tribunal hearing, the assessee's representative did not present any contrary decisions. The tribunal agreed with the CIT(A) that the interest on unpaid purchase tax is not interest under section 2(28A) of the IT Act but takes the character of tax. Therefore, it is subject to section 43B and is deductible only on actual payment. The tribunal upheld the CIT(A)'s order and dismissed the assessee's appeal on this ground.

2. Depreciation on Co-generation Plant:
- The AO found that the assessee claimed 80% depreciation on various components of the co-generation power plant, except for the turbine, which was allowed at the same rate. The AO reworked the depreciation at 15% for other assets, reducing the claimed depreciation.
- The assessee appealed to the CIT(A), who dismissed the appeal. The assessee then appealed to the tribunal, arguing that the issue was covered by a previous tribunal decision in the assessee's favor for the assessment year 2009-10.
- The tribunal reviewed the previous decision, which allowed higher depreciation for components integral to the co-generation system, such as RCC Chimney, Bagasse Drier, DC Drier, Steam Piping, Coal & Gas Feeding System, and Coal Handling System. The tribunal noted that these items are essential for the co-generation system's operation and thus qualify for higher depreciation.
- The tribunal also addressed the sub-station tower line, which was treated as revenue expenditure in the previous decision. The tribunal directed the AO to allow higher depreciation for the specified items and treat the sub-station tower line expenditure as revenue expenditure.
- The tribunal concluded by allowing the assessee's appeal on these grounds, directing the AO to follow the previous tribunal decision.

Conclusion:
- The appeal concerning the interest on purchase tax was dismissed, affirming that such interest is deductible only on actual payment under section 43B.
- The appeal regarding depreciation on the co-generation plant was allowed, directing the AO to grant higher depreciation on specified components and treat sub-station tower line expenditure as revenue expenditure.

Final Judgment:
- The appeal of the assessee is partly allowed, with specific directions to the AO regarding depreciation and treatment of expenditures. The order was pronounced in the open court on 20th December 2017.

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