2014 (7) TMI 1263 - AT - Income Tax

Disallowance of depreciation claimed on Wind Mill on the reasons that it has been incurred for development of the infrastructure of the land - Held that - From the nature of various payments, it is clear that separate amounts towards earth work and the foundation; erection and commissioning have already been paid to Suzion Infrastructure Ltd. Hence, in our opinion, the payments made to TNEB are not towards development of land infrastructure, foundations, erection and installing and commissioning etc., which in the sense of terminology of development of windmill are actually infrastructure charges. we are of the opinion that these charges paid to TNEB are for evacuation of land, towards fee of NOC of land and its registration and supervision charges to make unhindered land available and ensure technical specifications. Accordingly, the same cannot form part of the plant and machinery of windmill to be eligible for depreciation. In view of the above facts and circumstances of the case, we are of the considered opinion that the lower authorities are right in treating the payment towards permission for land utilization, NOC and registration of land and has rightly capitalized them with the cost of land and denied deprecation on this payment - Decided against assessee Addition towards interest on investment expenditure incurred in new the line of business - Held that - In order to allow as the amount of interest paid in respect of capital borrowed for the purpose of business must be of an existing business. In this case, as the business was not set up at the time of incurring the interest; therefore, no question of allowance of interest is allowable u/s 36(1)(iii). Whether this was a part of new business or not was a fact, which was for the assessee to establish and the assessee was failed to establish the fact even before us. Being so, it is not possible to uphold the contention of the assessee. In the premises, the lower authorities were right in disallowing the proportionate interest expenditure relating to the investment made in the new line of business - Decided against assessee

Summary

Issues Involved:
1. Disallowance of depreciation claimed on Wind Mill.
2. Disallowance of interest on investment expenditure incurred in a new line of business.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claimed on Wind Mill:

The assessee claimed depreciation on windmills, including infrastructure development charges of Rs. 96.90 lakhs paid to M/s Shubh Reality (South) Pvt Ltd, which was added to the cost of windmills. The Assessing Officer (AO) disallowed this depreciation, arguing that these charges were for land development and should be capitalized with the cost of land, not the windmill. The CIT(A) upheld this disallowance, noting that the charges paid to Tamil Nadu Electricity Board (TNEB) were administrative in nature, related to obtaining permission for land use, and not for the actual infrastructure development of the windmill. The CIT(A) emphasized that these charges were for ensuring unhindered land use and did not qualify as part of the wind turbine machinery. Consequently, the depreciation claimed on this amount was disallowed and added back to the assessee's income.

The Tribunal agreed with the CIT(A), stating that the payments made to TNEB were administrative fees for land use, NOC, and registration charges, and thus could not be considered part of the windmill's plant and machinery. The Tribunal confirmed that the lower authorities rightly treated these payments as part of the land cost and denied depreciation on the Rs. 96.90 lakhs. The ground taken by the assessee on this issue was dismissed.

2. Disallowance of Interest on Investment Expenditure Incurred in a New Line of Business:

The AO noticed that the assessee borrowed funds for investment in a new line of business (FM Radio), which had not commenced operations. The AO held that the interest on these borrowed funds should be capitalized and disallowed interest expenditure of Rs. 83.21 lakhs. The CIT(A) upheld this disallowance, citing Section 36(1)(iii) of the Income Tax Act, which mandates capitalization of interest on borrowed funds for the acquisition of an asset for the extension of existing business until the asset is put to use.

The assessee argued that the investment was made from its own funds and that the interest should not be disallowed. However, the Tribunal found that the assessee failed to establish a clear nexus between its own funds and the investment. The Tribunal noted that the assessee's balance sheet showed significant borrowed funds, and the investment in the new business was made out of these borrowed funds. The Tribunal emphasized that interest expenditure is allowable only if incurred in respect of an existing business. Since the FM Radio business had not commenced operations, the interest could not be allowed as a deduction. The Tribunal upheld the CIT(A)'s decision to disallow the proportionate interest expenditure related to the investment in the new line of business. The ground taken by the assessee on this issue was dismissed.

Conclusion:

The appeal filed by the assessee was dismissed on both grounds. The Tribunal upheld the disallowance of depreciation on the windmill and the disallowance of interest on investment expenditure incurred in the new line of business. The order was pronounced in the open court on July 18, 2014.