2013 (1) TMI 778 - AT - Income Tax

Disallowance of depreciation on wind mills @80% - Rate of depreciation on expenses incurred in connection with installation, erection and commissioning of the wind mills - Cost of civil work consisting of foundation/ground work - Held that - the cost incurred by the asessee on civil work cannot be treated as an integral part of the entire wind mill - depreciation is resticted to @ 10% - cost of foundation as well as cost incurred on erection and commissioning forms integral part of cost of the windmill and thus eligible for depreciation at 80% - Partly in favor of assessee Whether the profits earned on one unit can be set off against another unit - Held that - assessee had been setting off the loss of depreciation from different wind mill undertakings against the income of the other business - Assessee is maintaining separate books of accounts in respect of 3 wind mills and working out the profit or losses - three wind mills at the 3 locations are independently operated and the financial results are separately worked out - every unit constitute a separate undertaking engaged in the eligible business and losses from one unit cannot be set off against the profits of another unit engaged in the same business for the purpose of computing the deduction u/s 80IA

Issues Involved:
1. Disallowance of depreciation on windmills.
2. Classification of civil construction expenses and their depreciation rate.
3. Apportionment of costs related to windmills into different categories for depreciation.
4. Deduction under Section 80IA of the Income Tax Act for profits from windmill units.

Detailed Analysis:

1. Disallowance of Depreciation on Windmills:
The primary issue was whether the cost of foundation and civil construction for the installation of windmills should be treated as an integral part of the windmill and eligible for depreciation at 80%. The assessee argued that the depreciation on windmills was allowed in previous years at 80% and the facts had not changed. The Assessing Officer (A.O.) had disallowed this, treating the foundation and civil work as "building" with a 10% depreciation rate and erection and commissioning as "plant & machinery" with a 15% depreciation rate. The Tribunal referred to the decision in JCIT Range-1, Sangli Vs. M/s. Western Precicast Pvt. Ltd., Sangli, which supported the assessee's claim. Consequently, the Tribunal directed the A.O. to allow 80% depreciation on the cost of foundation and erection and commissioning, but upheld the 10% depreciation rate for civil work costs.

2. Classification of Civil Construction Expenses and Their Depreciation Rate:
The A.O. had classified civil construction expenses for bringing windmills into existence as "building" and allowed only 10% depreciation. The Tribunal, however, differentiated between civil work costs unrelated to foundation or erection and commissioning and upheld the A.O.'s action to restrict depreciation to 10% on such civil work. For other expenses integral to the windmill, the Tribunal allowed 80% depreciation.

3. Apportionment of Costs Related to Windmills:
The A.O. apportioned the total cost of windmills into different categories (turbine, foundation, erection, and commissioning) and applied different depreciation rates. The Tribunal found this apportionment method flawed, as it did not consider the integral nature of the windmill components. The Tribunal directed that the cost of foundation and erection and commissioning should be treated as part of the windmill, eligible for 80% depreciation, except for unrelated civil work costs.

4. Deduction Under Section 80IA of the Income Tax Act:
The issue was whether the profits from the Satara windmill unit could be considered independently for deduction under Section 80IA, despite losses in other windmill units. The A.O. had denied the deduction, aggregating profits and losses from all units. The Tribunal upheld the CIT(A)'s decision that each windmill unit should be treated as a separate undertaking for the purpose of Section 80IA. The Tribunal emphasized that the term "business" in Section 80IA(5) should be construed to mean "undertaking" or "enterprise," allowing the assessee to claim deductions for each unit independently. The Tribunal confirmed that losses from one unit could not be set off against profits from another unit for computing the deduction under Section 80IA.

Conclusion:
The Tribunal partly allowed the appeals of the assessee, directing the A.O. to allow 80% depreciation on the cost of foundation and erection and commissioning of windmills, while restricting depreciation on unrelated civil work to 10%. The Tribunal also upheld the CIT(A)'s decision allowing independent treatment of each windmill unit for deductions under Section 80IA, dismissing the revenue's appeals.

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