2015 (11) TMI 1607 - AT - Income Tax

Disallowance of higher rate of depreciation on windmills - allowability of similar depreciation rate as applicable to windmills, also to the foundation & civil work and erection & commissioning work executed for these windmills - Held that - . Since the civil work and erection & commissioning expenses incurred are in relation to installation of windmill, depreciation on the same should be provided at the rate applicable to windmill. We find that the aforesaid assertions made on behalf of the assessee before the Revenue remains uncontroverted. The expenses incurred on erection & commissioning, civil work, etc. being necessary adjunct to the windmill and is not meant for any other purposes other than for operational functioning of wind turbine and therefore cannot be treated differently. Therefore, impugned capital expenditure towards civil work & commissioning etc. also will qualify for the same rate of depreciation as applicable to wind turbine itself. The issue is no longer res-integra and is covered by in the case of Poonawala Finvest & Agro (P.) Ltd. vs. ACIT, (2008 (6) TMI 586 - ITAT PUNE ) wherein it has been clearly held that the capital expenditure incidental to the windmill has to be tested on the touchstone of the functional test and the assessee will be entitled to higher rate of depreciation on such incidental expenditure, if it has no other use except for power generation done by the windmill. - Decided in favour of assessee

Summary

Issues: Disallowance of depreciation on windmills

Issue 1: Disallowance of depreciation on windmills
The appeal was against the order of CIT(A) relating to the assessment year 2010-11 regarding the disallowance of depreciation on windmills by the Assessing Officer. The Assessing Officer recomputed the depreciation applying revised rates for foundation & civil work and erection & commissioning work of windmills, leading to disallowance of an alleged excess claim of depreciation. The CIT(A) upheld the disallowance, stating that different rates of depreciation are allowed for structures and machinery/plant due to their differing lifespans and purposes. The higher depreciation rates aim to encourage development in specific sectors. The Tribunal found that the expenses on civil work and commissioning were integral to the windmills' operational functioning and should qualify for the same depreciation rate as applicable to wind turbines. The decision was supported by previous Tribunal judgments. Therefore, the Tribunal held that the Revenue erred in disallowing the depreciation, and the appeal of the assessee was allowed.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeal and overturning the disallowance of depreciation on windmills. The decision was based on the integral nature of civil work and commissioning expenses to the operational functioning of wind turbines, qualifying them for the same depreciation rate as applicable to wind turbines themselves. The judgment highlighted the importance of considering the functional test to determine depreciation eligibility for incidental expenditures related to power generation activities.