2014 (6) TMI 922 - AT - Income Tax

Deduction u/s. 80IA(4)(iv)(a) - Held that - Deduction u/s.80-IA of the Act is first claimed and thereafter for a period of 10 years from the initial assessment year. The initial assessment year is not the year in which the Assessee begins to make profits in the eligible business but the year in which deduction is claimed from eligible business. In respect of period prior to such claim loss/depreciation if they remain absorbed cannot fictionally be reduced from the profits on which deduction is to be allowed. In the light of the aforesaid judgment of the Hon ble High Court of Karnataka in the case of CIT v. Anil H. Ltd. (2011 (1) TMI 1047 - ITAT Bangalore ) we are of the view that there is no merit in this appeal by the revenue and consequently the same is dismissed. - Decided in favour of assessee. Rejection of claim of the assessee for depreciation on the value of lease rent paid by including it as part of the plant (windmill) - Held that - There is no evidence on record to show that there is a technical requirement of erecting the windmills at high altitudes. We will however proceed on the assumption that such a technical requirement exists. Even then in our view the lease rent paid for acquiring leasehold rights over the land can never be treated as cost of the plant (windmill). The functional test cannot be extended to a case of lease rent for acquiring leasehold rights over the land whatever be the technical requirement of erecting a plant. The law is well settled that no depreciation is to be allowed on land. By placing reliance on the functional test it is not possible to allow depreciation on land indirectly. If such a claim were to be allowed then it could be extended to a case of a land over which a shopping mall is constructed. A shopping mall requires a good area/location main road for good business. Can it be said that the rent paid for the land over which the shopping mall is constructed is part of the building on which depreciation is to be allowed? In our view by applying the functional test it is possible to contend in all the cases that the land is a tool of trade and has to be regarded as plant or building. We therefore decline to accept the proposition canvassed on behalf of the assessee. With regard to the alternative claim made by the assessee the claim cannot fall within the parameters of section 30 of the Act because that section covers only rent paid on building. The claim has therefore to be considered u/s. 37(1) of the act. On this aspect we find that the Hon ble High Court of Karnataka in the case of HMT Ltd. (1992 (11) TMI 37 - KARNATAKA High Court ) has considered the premium for acquiring leasehold rights as nothing but rent paid in advance. The rent paid in advance was for acquiring leasehold rights over the land. Such payment had been considered by the Hon ble Court as revenue expenditure. In view of the aforesaid decision of the Hon ble High Court which is in pari materia with the facts of the present case we are of the view that the lump sum rent paid for the entire period of 30 years has to be considered as revenue expenditure. The CIT(A) wrongly distinguished this decision as a case of lease of factory building. We therefore accept the alternative prayer of the assessee. Thus the relevant grounds of appeal in all the three assessment years are treated as allowed on the alternative ground. - Decided in part in favour of assessee Disallowance of depreciation on Windmill installed at Kolahalu Village on the ground that the Windmill was not actually put to use - Held that - Admittedly the value of the windmills on which depreciation was claimed by the Assessee entered the block of assets on which depreciation was claimed. The windmills had been installed and acquired by the Assessee. In such circumstances we are of the view that the decision of the Hon ble Delhi High Court in the case of Bharat Aluminium Co. Ltd. (2009 (10) TMI 505 - DELHI HIGH COURT) will squarely apply. - Decided in favour of assessee

Issues Involved:
1. Deduction under Section 80IA(4)(iv)(a) of the Income Tax Act.
2. Treatment of depreciation and losses for windmill units.
3. Classification of lease rent for land as capital or revenue expenditure.
4. Allowance of depreciation on windmills not put to actual use.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IA(4)(iv)(a) of the Income Tax Act:
The assessee, a partnership firm engaged in mining and exports, installed windmills for power generation and claimed deductions under Section 80IA(4)(iv)(a). The Assessing Officer (AO) denied the deduction, arguing that the profits should be computed as if the windmill business was the only source of income, leading to a notional carry-forward of losses and unabsorbed depreciation. The CIT(A) sided with the assessee, following the Tribunal's decision in Anil H. Lad's case, which was upheld by the Karnataka High Court. The High Court ruled that Section 80IA(5) applies only when the deduction is first claimed, and losses from prior years, already set off against other income, should not be carried forward. The Tribunal agreed, dismissing the revenue's appeal.

2. Treatment of Depreciation and Losses for Windmill Units:
The AO combined the depreciation of Unit-I and Unit-II, resulting in a loss, and denied the deduction under Section 80IA. The CIT(A) and the Tribunal followed the Karnataka High Court's ruling in Anil H. Lad, which stated that past losses set off against other income should not be carried forward for deduction purposes. The Tribunal confirmed that once losses are absorbed, they do not exist for future set-offs, thus allowing the assessee's claim for deductions without carrying forward the notional losses.

3. Classification of Lease Rent for Land as Capital or Revenue Expenditure:
The assessee included lease rent for land in the cost of windmills, claiming it as part of the plant for depreciation purposes. The AO and CIT(A) rejected this, treating the lease rent as capital expenditure, not eligible for depreciation. The Tribunal disagreed with the assessee's argument that the lease rent should be part of the plant, citing the principle that land itself is not depreciable. However, the Tribunal accepted the alternative claim that the lease rent should be treated as revenue expenditure, following the Karnataka High Court's decision in HMT Ltd., which allowed lease premium as revenue expenditure.

4. Allowance of Depreciation on Windmills Not Put to Actual Use:
The AO denied depreciation on a windmill commissioned but not used before the financial year-end. The CIT(A) upheld this view, relying on the decision in Yellamma Dasappa Hospital, which required actual use for depreciation. The assessee argued that with the introduction of block assets, actual use is irrelevant. The Tribunal agreed, citing the Delhi High Court's decision in Bharat Aluminium Co. Ltd., which stated that once assets are part of a block, individual use is not required for depreciation. The Tribunal allowed the depreciation claim, emphasizing that the windmills were part of the block assets.

Conclusion:
The Tribunal dismissed the revenue's appeals and allowed the assessee's appeals, confirming the deductions under Section 80IA, treating lease rent as revenue expenditure, and allowing depreciation on windmills as part of block assets without requiring actual use.

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