Windmill depreciation and section 80IA principles: integral works qualify, own funds limit interest disallowance, and prior losses stay absorbed.

Windmill civil construction and electrical works that are integral to installation and functioning qualify for the higher windmill depreciation rate, as the project cannot be artificially bifurcated. Under section 14A read with Rule 8D, no interest disallowance was warranted where own funds exceeded investments and no borrowed-funds nexus was shown, though the administrative expenditure component was sustained. For section 80IA, depreciation or losses of years before the initial assessment year, once absorbed against other income, cannot be notionally reintroduced in computing the deduction. Interest and miscellaneous income of the 100% export oriented unit required factual verification for nexus with the export business, so that issue was remanded.

---

---

Issues: (i) Whether civil construction and electrical works forming part of the windmill were eligible for higher depreciation at the windmill rate; (ii) whether the disallowance under section 14A read with Rule 8D was sustainable in full; (iii) whether deduction under section 80IA could be reduced by notional depreciation of earlier years already set off against other income; and (iv) whether interest and miscellaneous income of the 100% export oriented unit were eligible for deduction under section 10B.

Issue (i): Whether civil construction and electrical works forming part of the windmill were eligible for higher depreciation at the windmill rate.

Analysis: The civil and electrical components were found to be necessary for installation and functioning of the windmill and to form part of the same integrated plant. The Tribunal followed binding appellate precedent in the assessee's own case and the view that the windmill project could not be artificially bifurcated for different depreciation rates.

Conclusion: The issue was decided in favour of the assessee and higher depreciation was allowed.

Issue (ii): Whether the disallowance under section 14A read with Rule 8D was sustainable in full.

Analysis: The assessee's own funds were more than the investments, so the presumption applied that the investments were made out of own funds and no direct nexus of borrowed funds with the exempt investments was established. The interest component computed under Rule 8D(2)(ii) was therefore not justified, while the administrative expenditure component under Rule 8D(2)(iii) was upheld.

Conclusion: The issue was partly decided in favour of the assessee and partly in favour of the Revenue.

Issue (iii): Whether deduction under section 80IA could be reduced by notional depreciation of earlier years already set off against other income.

Analysis: The Tribunal applied the principle that once losses or depreciation of years prior to the initial assessment year have been absorbed against other income, they cannot be notionally brought forward again for computing deduction under section 80IA. The eligible undertaking was to be examined from the initial assessment year onwards.

Conclusion: The issue was decided in favour of the assessee and the Revenue's appeal failed.

Issue (iv): Whether interest and miscellaneous income of the 100% export oriented unit were eligible for deduction under section 10B.

Analysis: The Tribunal held that the direct nexus between the disputed receipts and the export business had not been examined and required factual verification. The matter was therefore restored to the Assessing Officer for fresh examination of the linkage between the receipts and the eligible undertaking.

Conclusion: The issue was set aside for reconsideration and was not finally decided on merits.

Final Conclusion: The assessee obtained relief on depreciation and part of the section 14A disallowance, the Revenue failed on the section 80IA issue, and the section 10B issue was remanded for verification.

Ratio Decidendi: Windmill civil and electrical works forming an inseparable part of the installed windmill qualify for the higher depreciation rate, section 14A disallowance is not warranted on interest where own funds exceed investments absent a proved nexus with borrowed funds, and prior years' losses or depreciation already absorbed cannot be notionally reintroduced for section 80IA computation.

---