2014 (9) TMI 211 - AT - Income Tax

Depreciation on the Wind Mill on pro-rata basis Nature of work and rate of depreciation - Whether the earth work and the foundation is nothing but civil work on which depreciation is allowable @ 10% whereas installation and commissioning work constitute block of plant and machinery on which depreciation is allowable @ 15% - Held that - The cost of the new wind turbine will include cost of component & accessory, cost of component for generation of electricity supply of rotor blades, electrical items, cost of tubular tower, cost of work including foundation work and labour related cost as decided in ITAT, Pune in the case of Poonawala Finwest & Agro (P) Ltd. Vs. ACIT 2008 (6) TMI 586 - ITAT PUNE The functional test of the foundation has been explained by the CIT(A). So far as the foundation is concerned, the functional test is fulfilled - There should not be quarrel that civil work is involved in the erection of the foundation, but every civil work cannot be treated as civil work as required for bringing construction - cost on the foundation of the wind mill is eligible for the depreciation at the rate 180% or the rate which is applicable to the wind mill as it is integral part of cost of wind mill erection - Same way, the cost for commission and erection cannot be said to be separate from the wind mill as it is directly related to the functioning of wind mill - CIT(A) has rightly allowed the depreciation on the pro rata basis on the cost of foundation to the extent of the civil work - also in Assistant Commissioner of Income Tax (OSD) Versus Parry Engineering & Electronics P. Ltd. 2012 (10) TMI 224 - ITAT, AHMEDABAD it has been held that the foundation is a part of the turbine and is eligible for the rate of depreciation which is applicable to the wind mill the order of the CIT(A) is upheld Decided against Revenue.

Summary

Issues Involved:
1. Depreciation on Wind Mill components - Pro-rata basis.
2. Applicability of ITAT Pune decision in Poonawala Finvest & Agro Pvt. Ltd. vs. ACIT.
3. Reliance on general technical reports versus specific evidence for installation and construction of the windmill.

Issue-wise Detailed Analysis:

1. Depreciation on Wind Mill components - Pro-rata basis:
The Revenue challenged the decision of the Commissioner of Income Tax (Appeals), Kolhapur, on allowing depreciation on the windmill on a pro-rata basis. The primary contention was that the earthwork and foundation should be categorized as civil work eligible for 10% depreciation, while installation and commissioning should be treated as plant and machinery eligible for 15% depreciation. The assessee argued that the foundation and commissioning costs are integral to the windmill and should be eligible for 80% depreciation. The appellate authority supported the assessee's view, emphasizing that the foundation work, although involving civil work, is essential for the windmill's operation. The functional test was applied to determine that the foundation is an integral part of the windmill, thus qualifying for higher depreciation.

2. Applicability of ITAT Pune decision in Poonawala Finvest & Agro Pvt. Ltd. vs. ACIT:
The Revenue relied on the ITAT Pune decision in Poonawala Finvest & Agro Pvt. Ltd. vs. ACIT, which allowed different depreciation rates for civil work and plant & machinery. However, the assessee contended that this decision pertained to costs incurred for control rooms, site development, and internal roads, which are distinct from the foundation and commissioning costs of the windmill. The appellate authority distinguished the current case from Poonawala Finvest, noting that the latter did not address the foundation and commissioning costs directly. It was concluded that the foundation and commissioning costs are integral to the windmill and should be depreciated at the same rate as the windmill itself.

3. Reliance on general technical reports versus specific evidence for installation and construction of the windmill:
The Revenue argued that the Commissioner of Income Tax (Appeals) erred in relying on general technical reports instead of specific evidence provided by the assessee. The appellate authority examined the technical aspects and functional requirements of windmill foundations, concluding that the foundation is a specialized structure designed to withstand various loads and operational conditions. The detailed technical analysis demonstrated that the foundation is not merely a civil construction but a crucial component of the windmill's functionality. Therefore, the costs associated with the foundation and commissioning were deemed integral to the windmill, justifying the higher depreciation rate.

Conclusion:
The appellate authority upheld the Commissioner of Income Tax (Appeals)'s decision to allow depreciation on the windmill's foundation and commissioning costs at the higher rate applicable to the windmill. The decision distinguished the current case from the Poonawala Finvest case and emphasized the functional integration of the foundation with the windmill. The Revenue's appeal was dismissed, affirming the pro-rata depreciation approach for the windmill components.