Depreciation on wind mill denied due to lack of ownership proof but share premium addition under section 56(2)(viib) deleted

ITAT Delhi dismissed the assessee's appeal regarding depreciation on wind mill for A.Y. 2015-16. The tribunal upheld the disallowance since the seller company APIL had already claimed depreciation on the same asset, and the assessee failed to prove ownership through documentary evidence. The twin conditions of ownership and business use were not satisfied. However, the tribunal allowed the assessee's appeal regarding addition under section 56(2)(viib) for shares issued at premium to its holding company. The tribunal held that shares were issued at fair market value certified by a chartered accountant using the recognized Discounted Cash Flow method, and transactions between holding and subsidiary companies don't attract deemed income provisions.

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Issues Involved:
1. Disallowance of depreciation on windmills.
2. Addition under section 56(2)(viib) of the Income Tax Act, 1961.

Issue 1: Disallowance of Depreciation on Windmills

The assessee claimed depreciation of Rs. 12,96,28,561/- on windmills under section 32 of the Income Tax Act, 1961. The Ld. Assessing Officer (AO) disallowed this claim, stating that the transfer of the windmills from M/s Ansal Properties and Infrastructure Limited was not completed within the financial year 2014-15. The AO observed that the obligations under the slump sale agreement dated 23.03.2015 were not fulfilled by the end of the financial year. The Ld. Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, noting that the seller had not recorded the sale of the windmills in its books for the financial year 2014-15 and continued to claim depreciation on the asset. The Tribunal agreed with the findings of the AO and CIT(A), concluding that the conditions of ownership and use of the asset for claiming depreciation were not satisfied by the assessee for the relevant assessment year. Therefore, the disallowance of depreciation was confirmed.

Issue 2: Addition under Section 56(2)(viib)

The assessee issued 12,03,000 equity shares at Rs. 50 per share, supported by a valuation report using the Discounted Cash Flow (DCF) method as prescribed under Rule 11UA. The AO rejected this valuation, citing inflated financial projections and instead computed the fair market value at Rs. 23.05 per share based on the Net Asset Value method, resulting in an addition of Rs. 3,24,20,850/- under section 56(2)(viib). The CIT(A) upheld the AO's decision, noting that the projections used in the DCF method were unreliable due to unfulfilled acquisition plans of windmill projects. The Tribunal, however, found that the DCF method is a recognized method under Rule 11UA and that the shares were issued to the assessee's 100% holding company. The Tribunal held that in such cases, the provisions of section 56(2)(viib) are not applicable, and the AO/CIT(A) were not justified in adopting a different valuation method. The Tribunal cited similar cases where the DCF method was upheld and ruled in favor of the assessee, thereby deleting the addition made under section 56(2)(viib).

Conclusion

The Tribunal upheld the disallowance of depreciation on windmills but deleted the addition made under section 56(2)(viib), thereby partly allowing the appeal of the assessee.

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