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2014 (1) TMI 1123 - AT - Income TaxDepreciation on windmills - Held that - Following Union of India v. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME Court - The word sham, if it has any meaning in law, it means acts done or documents executed by the parties to the sham which are intended by them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create for acts or documents to be a sham , with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a shammer affect the rights of a party whom he deceived - If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non- est based upon some hypothetical assessment for the real motive of the assessee - The court must deal with what is tangible in an objective manner and cannot afford to chase a will-o - the-wisp. The transaction of purchase of WEGs by the assessee cannot be termed as a sham transaction - WIL sold 28 WEGs to IEL on 15.3.2006 and the same have been accounted for as sale in its books of account for the year-ended 31.3.2006 and also accounted for the income from the said sale proceeds for the AY 2006-07. No depreciation was claimed on those WEGs for the year ended 31.3.2006 by WIL or IEL - IEL confirmed the sale of WEGs to the assessee as on 15th and 24th of March 2006 which have been duly accounted for as sale for the year-ended 31.3.2006 - the assessee had purchased the WEGs from IEL on 15th and 24th March 2006 and as such it was the actual and legitimate owner of those WEGs as on 31.3.2006 and, accordingly, claimed depreciation for the year-ended 31.3.2006 - Neither WIL nor IEL had claimed depreciation for the F.Y. ending 31.03.2006 - income from the sale of power generated from WEGs for the period from 15.3.2006 ending on 31.3.2006 has been duly accounted for and offered to tax by the assessee and NOT either by IEL or WIL. This assertion amply exhibits that the assessee was the legitimate owner of those WEGs in the month of March, 2006 itself - The transaction was genuine and the assessee should be allowed depreciation. Set off of the loss pertaining to the rectified spirit Unit - Held that - The scheme of demerger has been approved by the Hon ble High Courts of Andhra Pradesh and Karnataka clearly vouch that the transfer of the under-taking was on a going concern basis - The assets, liabilities, employees, debts, obligations, rights etc., of the undertaking prior to the demerger stand vested with the assessee upon demerger - The assessee is eligible to the benefits u/s 72A (4) of the Act - The Act does not state that the under-taking being demerged ought to be a going concern at the time of demerger - It only states that the under-taking being demerged should stand transferred in a manner similar to the manner in which a going concern is transferred - Decided in favour of assessee. Disallowance of interest - Held that - Decision in CIT v. Reliance Utilities and Power Ltd 2009 (1) TMI 4 - HIGH COURT BOMBAY followed - If there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments - The interest was deductible - Decided in favour of assessee. Disallowance of prior period expenses - Held that - The issue has not been dealt with properly either by the AO or the first appellate authority for that matter - The reasoning of the AO in disallowing the claim of the assessee as well as the finding of the CIT (A) in sustaining the stand of the AO is very cryptic - The issue is restored on the file of the AO with a specific direction to look into the issue afresh with reference to the details which will be furnished by the assessee.
Issues Involved:
1. Disallowance of depreciation on Wind Mills. 2. Disallowance of set-off of brought forward loss of rectified spirit unit. 3. Disallowance of interest on loans. 4. Disallowance of prior period expenditure. Issue-wise Detailed Analysis: 1. Disallowance of Depreciation on Wind Mills: The assessee claimed depreciation of Rs. 9,73,54,400/- on 37 wind mills purchased from M/s Indowind Energy Limited (IEL) in March 2006. The AO disallowed the claim, citing lack of evidence such as bills/invoices during a survey, contradictions in statements of the assessee's personnel, and delayed notification to end-users about the transfer. The CIT (A) upheld the disallowance, noting contradictions in the statements of the MD and Project Consultant, discrepancies in the Directors' and auditors' reports, and the timing of tripartite agreements. The Tribunal observed that: - WIL sold 28 WEGs to IEL on 15.3.2006, accounted for in its books for the year-ended 31.3.2006. - IEL confirmed the sale to the assessee on 15th and 24th March 2006. - The income from power generated by the WEGs was accounted for by the assessee from 15th to 31st March 2006. - The survey conducted before the end of the financial year indicated the authorities were aware of the transaction. The Tribunal concluded that the transaction was not a sham and allowed the depreciation claim. 2. Disallowance of Set-off of Brought Forward Loss of Rectified Spirit Unit: The AO disallowed the set-off of Rs. 7 crores of losses from the rectified spirit unit of MOL, stating it was not a 'going concern' as per s. 2(19AA) of the Act. The CIT (A) upheld this, terming the unit a 'dead concern'. The Tribunal noted: - The scheme of demerger was approved by the High Courts of Andhra Pradesh and Karnataka. - The demerger was on a 'going concern' basis, transferring assets, liabilities, employees, etc., to the assessee. The Tribunal referenced the Supreme Court's ruling in Marshall Sons & Co (India) Ltd v. ITO, which stated that once demerger is approved, it relates back to the appointed date. The Tribunal concluded that the assessee was eligible for the set-off under s. 72A(4) of the Act. 3. Disallowance of Interest on Loans: The AO disallowed Rs. 10,97,85,319/- of interest, arguing that the assessee gave interest-free loans to related concerns while paying interest on borrowed funds. The CIT (A) upheld the disallowance, stating the loans came from a mixed kitty of funds and lacked commercial expediency. The Tribunal found: - The assessee had sufficient non-interest bearing funds (Rs. 170.93 crores) to cover the interest-free loans (Rs. 117.39 crores). - The interest-bearing loans were for specific purposes like working capital and vehicle loans. Citing the Bombay High Court's ruling in CIT v. Reliance Utilities & Power Ltd, the Tribunal held that if interest-free funds are sufficient to cover investments, the presumption is that investments are from those funds. The Tribunal deleted the disallowance. 4. Disallowance of Prior Period Expenditure: The AO disallowed Rs. 10,58,536/- of prior period expenses, stating the assessee, following the mercantile system, should have made provisions for these expenses. The CIT (A) upheld the disallowance. The Tribunal noted the assessee's justification for each expense and found that the AO and CIT (A) did not properly analyze the issue. The Tribunal remanded the matter to the AO for fresh examination, directing the AO to consider the details provided by the assessee. Conclusion: - The appeal for AY 2006-07 was allowed. - The appeal for AY 2007-08 was partly allowed. Order pronounced in the Open Court on 22nd November, 2013.
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