2013 (9) TMI 675 - AT - Income Tax

Deduction u/s.80-IA(4)(iv) - Substantial expansion - electricity distribution company. - AO concluded in his assessment that the Assessee had just made budgetary allocation for proposed capital investments and has not made the actual investment. He held that budgetary allocation of funds does not tantamount to an increase in book value of assets unless the actual investment is made Held that - Reliance has been placed upon the judgment in the case of M/s.Bangalore Electricity Company Ltd 2012 (8) TMI 337 - ITAT, Bangalore , wherein Tribunal has already taken a view that the word undertake in section 80-IV(4)(iv)(c) to mean that there should be an increase in the Plant and Machinery by at least 50% of the book value of such Plant and Machinery as on 1-4-2004 meaning thereby that there should be capitalization of the Plant and Machinery on completion of installation of Plant and Machinery. The Tribunal has taken the view that the purpose of introduction of the aforesaid provision was to achieve modernization in operation of electricity company consequent to undertaking substantial expansion and the benefit cannot flow to the assessee unless substantial expansion is completed which would result operational efficiency of the electricity company Order of Commissioner(A) has been confirmed Decided against the Assessee. Deduction u/s 80IA(4)(iv)(b) of the Income Tax Act Held that - Conditions are that the assessee should start transmission or distribution by laying a new network of new transmission or distribution line No reference to the addition in the Network lines has been made before either A.O. or Commissioner(A) and not anything separate has been shown in the Balance- Sheet - The opening written down value (WDV) of the same was Rs.837,41,39,851/- and there were additions to the tune of Rs.48,03,76,632/-. As to whether these were additions because of laying of network of new transmission or distribution lines or simple additions to existing line cable network is not known - Claim made by the assessee without a sound basis and without proper facts available on record deserves to be rejected Decided against the Assessee. Deprecation on on assets handed over to the appellant by consumers for their running and maintenance - Held that - assessee can claim depreciation on an asset only to the extent that the actual cost of such asset was actually met by himself and not on the cost met by any other person. The assets in question here happen to be transformers which are installed at consumers premises at their own cost and the whole of the cost of the assets are met by them. - The cost of certain assets collected by the assessee from its consumer, can by no stretch of imagination, be considered as cost of asset on which depreciation can be claimed by the assessee. The fact that the assets are subsequently transferred by the consumer to the assessee and thereafter the assessee maintains the assets are all facts for which the assessee has not given any basis in the form of entries in the books of account. - Depreciation not allowed - Decided against the assessee.

Summary

Issues Involved:
1. Claim for deduction under Section 80-IA(4)(iv)(c) of the Income Tax Act, 1961.
2. Alternative claim for deduction under Section 80-IA(4)(iv)(b) of the Income Tax Act, 1961.
3. Addition on account of loss on sale of fixed assets.
4. Depreciation on assets handed over by consumers for their running and maintenance.

Issue-wise Detailed Analysis:

1. Claim for Deduction under Section 80-IA(4)(iv)(c):
The assessee, an electricity distribution company, claimed a deduction under Section 80-IA(4)(iv)(c) of the Income Tax Act, 1961, for the assessment year 2006-07. The provision requires substantial renovation and modernization of the existing network of transmission or distribution lines, defined as an increase in the plant and machinery by at least fifty percent of the book value as on April 1, 2004. The assessee initially claimed that it had undertaken such renovation and modernization, but upon scrutiny, it was found that the actual investments were significantly lower than claimed. Consequently, the Assessing Officer (AO) rejected the claim, and the CIT(A) confirmed this disallowance. The Tribunal upheld the CIT(A)'s decision, emphasizing that the capitalization of the expenditure on renovation and modernization in the books of account is a prerequisite for allowing the deduction under Section 80-IA(4)(iv)(c).

2. Alternative Claim for Deduction under Section 80-IA(4)(iv)(b):
The assessee alternatively claimed deduction under Section 80-IA(4)(iv)(b), which pertains to starting transmission or distribution by laying a network of new transmission or distribution lines within a specified period. The CIT(A) examined this claim and noted that the three clauses in sub-section 4(iv) are mutually exclusive. However, the CIT(A) concluded that the assessee did not meet the conditions of sub-clause (b) either, as the assets were inherited from the erstwhile Karnataka Electricity Board, and the transfer occurred before the amendment's effective date. The Tribunal agreed with the CIT(A)'s findings and rejected the claim, noting that the assessee did not provide sufficient evidence to support the claim for laying new transmission or distribution lines.

3. Addition on Account of Loss on Sale of Fixed Assets:
The assessee claimed a loss of Rs. 39,89,124 on the sale of fixed assets, which was disallowed by the AO on the grounds that loss on sale of fixed assets cannot be considered a business expense. The CIT(A) upheld this disallowance, and the Tribunal concurred, stating that after the introduction of the concept of block of assets, any sale or discarding of an asset should simply reduce the block of assets, and profits or losses on sale are not computable. The Tribunal dismissed the assessee's ground on this issue.

4. Depreciation on Assets Handed Over by Consumers:
The assessee claimed depreciation on assets funded by consumer contributions, which was disallowed by the AO. The CIT(A) confirmed the disallowance, stating that the assets were not depreciable by the assessee as the cost was met by the consumers, and the assets were not owned or used by the assessee for its business. The Tribunal upheld the CIT(A)'s decision but remanded the matter to the AO to reconsider the actual quantum of disallowance based on the alternative argument presented by the assessee.

Conclusion:
The appeal of the assessee was treated as partly allowed for statistical purposes, with specific directions for the AO to reassess the quantum of disallowance regarding depreciation on consumer-funded assets. The Tribunal upheld the disallowances made by the AO and CIT(A) on other grounds, emphasizing adherence to the specific conditions laid down in the Income Tax Act for claiming deductions and depreciation.