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Issues Involved:
1. Disallowance of Depreciation on Windmills 2. Application of Explanation 3 to Section 43(1) of the Income Tax Act 3. Determination of Actual Cost of Assets Summary: 1. Disallowance of Depreciation on Windmills The assessee, engaged in the business of transportation of gases and chemicals and generation and sale of wind power, claimed depreciation on three windmills purchased from Vestas RRB India Ltd. The Assessing Officer (AO) doubted the credibility of these transactions, particularly the windmill purchased on 30-03-2004, suspecting it was not possible to install and commission it before the end of the financial year. The AO confronted the assessee, who explained that the windmills were old and in working condition, previously owned by Snowcem India Ltd. and generating power before 31-03-2004. However, the AO noted discrepancies, including the resale of windmills not being mentioned in the sale bill and Snowcem already claiming depreciation on these windmills. The AO applied Explanation 3 to Section 43(1) and allowed depreciation based on the Written Down Value (WDV) in Snowcem's books. 2. Application of Explanation 3 to Section 43(1) of the Income Tax Act The AO argued that the main purpose of the transaction was to reduce tax liability by claiming depreciation on an enhanced cost. The AO fulfilled the conditions for applying Explanation 3 to Section 43(1), noting that the windmills were previously used by Snowcem and the transaction seemed designed to reduce tax liability. The AO determined the actual cost based on the WDV in Snowcem's books, rejecting the assessee's plea that the transaction was genuine. The AO relied on judicial precedents to support this application. 3. Determination of Actual Cost of Assets The CIT(A) upheld the AO's decision, noting that the determination of actual cost should ensure appropriateness in the context of the facts and circumstances. The CIT(A) observed that the windmills were still in Snowcem's name in the records of the Maharashtra State Electricity Board and that the transaction was routed through Vestas to obscure the WDV in Snowcem's books. The CIT(A) also noted that Snowcem had shown short-term capital gains but set them off against losses, resulting in no tax liability. The CIT(A) dismissed the assessee's arguments and upheld the AO's application of Explanation 3 to Section 43(1). On appeal, the Tribunal considered the assessee's submissions, including the genuineness of the transaction, the unrelated nature of the parties, and the reasonableness of the cost paid for the windmills. The Tribunal found merit in the assessee's arguments, noting that the AO and CIT(A) did not determine the fair market value of the windmills and merely adopted the WDV in Snowcem's books. The Tribunal held that the actual cost paid by the assessee should be considered for allowing depreciation, relying on judicial precedents that emphasize the need to determine actual cost based on market conditions and the real worth of the assets. Conclusion The Tribunal allowed the appeal, directing that the actual cost paid by the assessee to Vestas RRB India Ltd. be considered for depreciation purposes, rejecting the AO's and CIT(A)'s application of Explanation 3 to Section 43(1) based solely on the WDV in Snowcem's books.
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