2007 (6) TMI 305 - AT - Income Tax

Summary

Issues Involved:
1. Reduction of depreciation and expenses for repair and maintenance of Wind Electric Generators (WEG) from the eligible profit for the purpose of deduction under section 80-IA.
2. Eligibility of the income from electricity generated from WEG for deduction under section 80-IA.
3. Allocation of expenses related to WEG between the business of electricity generation and demonstration for sales promotion.

Detailed Analysis:

1. Reduction of Depreciation and Expenses for Repair and Maintenance of WEG:
The assessee contended that the WEGs were primarily installed for demonstration purposes to promote sales, and hence, the related depreciation and repair expenses should not be deducted from the income generated from electricity for the purpose of section 80-IA. The Assessing Officer (AO) disagreed, reducing the depreciation and repair expenses from the eligible profit for deduction under section 80-IA. The CIT(A) upheld the AO's decision. The Tribunal supported this view, stating that once the WEGs were used for generating electricity, the related expenses must be deducted to compute the eligible profit for section 80-IA deduction. The Tribunal emphasized that the generation of electricity became a business activity, and thus, the related expenses, including depreciation, must be considered.

2. Eligibility of Income from Electricity Generated from WEG for Deduction under Section 80-IA:
The assessee argued that the income from electricity generation was incidental to the main business of selling WEGs and should be eligible for deduction under section 80-IA. The AO and CIT(A) allowed the deduction but reduced the expenses. The Tribunal clarified that for the deduction under section 80-IA, the income must be derived from the business of the industrial undertaking. The Tribunal rejected the assessee's claim that the generation of electricity was merely incidental, affirming that the income from electricity generation was indeed from an eligible business activity under section 80-IA.

3. Allocation of Expenses Related to WEG:
The assessee did not maintain separate accounts for the two activities (sale of WEG and sale of electricity). The AO allocated depreciation and repair expenses to the electricity generation activity. The Tribunal upheld this allocation, rejecting the assessee's argument for proportionate allocation. The Tribunal stated that the expenses related to the WEGs used for generating electricity must be deducted from the income generated from that activity, as per section 80-IA(5), which mandates computing the income of the eligible business as if it were the only source of income.

Conclusion:
The Tribunal concluded that the AO and CIT(A) correctly reduced the depreciation and repair expenses from the income generated from electricity for the purpose of section 80-IA deduction. The Tribunal emphasized that the income from electricity generation was a business activity, and the related expenses must be considered. The appeals filed by the assessee were dismissed, affirming the decisions of the AO and CIT(A).