2018 (1) TMI 1111 - HC - Income Tax

Disallowance of depreciation claimed on the Wind Turbine Generators - Held that - To install the wind turbine generators, the assessee must have excavated some earth on the land it purchased. Such excavation, to our mind, does not amount to improving the land; rather, it amounts to a preparatory step for erecting the wind turbines. Therefore, the land evacuation, if any, must be taken as part of infrastructure development for establishing the windmills. AO and both the appellate authorities have misread and misapplied the evidence, and that has led to the perversity of findings. We reckon it to be a judicially reviewable error and accordingly set aside the Tribunal s finding on the depreciation. As a result, the depreciation of ₹ 38,76,000 (50% for second half addition) claimed on the windmills was allowed. Nature of expenditure - disallowing interest on investment expenditure the assessee incurred on its new the line of business - Held that - Tribunal, while concurring with the primary and appellate authorities, has observed that to claim the benefit of expenditure, it must concern business carried on by the assessee, and the profits to be computed and assessed to tax should be earned after the business is set up. It has concluded on facts that, by the time the assessee claimed the tax benefit, it had not set up the business or made it operational; so the question of interest concession under section 36 (1) (iii) of the Act does not arise. Indisputably, the assessee could not demonstrate to AO s satisfaction that it actually invested its own funds rather than those it borrowed. Thus, we find it difficult to upset the concurrent findings. Indeed, the assessee did enter a new line of business, unconnected to its existing business, and it had not by then commenced that new business - uphold the Tribunal s findings on the AO s disallowing interest on investment expenditure the assessee incurred on its new the line of business.

Summary

Issues Involved:
1. Disallowance of depreciation on windmills.
2. Nature of expenditure on infrastructure development.
3. Disallowance of interest on investment expenditure for a new line of business.
4. Entitlement to interest-free expenditure under Section 36(1)(iii) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation on Windmills:
The appellant-assessee, a public limited company, purchased three windmills during the assessment year 2006-07 and claimed depreciation on them. The Revenue disallowed ?38,76,000 of the depreciation claimed, arguing that ?96,90,000 paid to the Tamil Nadu Electricity Board (TNEB) for infrastructure development charges was actually spent on land development, not infrastructure for the windmills. The Court found that the authorities misinterpreted the evidence, concluding that the amount was indeed spent on infrastructure development for the windmills. The Court set aside the Tribunal’s finding, allowing the depreciation claim of ?38,76,000.

2. Nature of Expenditure on Infrastructure Development:
The assessee paid ?1,41,90,000 to M/s. Shubh Realty (South) Pvt. Ltd., which included ?96,90,000 towards Infrastructure Development Charges (IDC) to TNEB. The Revenue treated this as a cost related to land development. The Court examined the debit notes and TNEB’s communication, concluding that the expenditure was for developing the infrastructure necessary for the windmills, not for land development. The authorities' conclusion that the expenditure was for land development was deemed incorrect.

3. Disallowance of Interest on Investment Expenditure for a New Line of Business:
The assessee entered a new line of business by obtaining a license to operate an FM Radio and claimed that the investment was from its own funds. The AO disallowed ?83,21,600, assuming the investment was from borrowed funds. The Court upheld the Tribunal’s finding that the assessee could not satisfactorily prove that it used its own funds. The Tribunal concluded that the new business had not commenced operations, thus the interest on the borrowed capital used for acquiring the license could not be deducted under Section 36(1)(iii).

4. Entitlement to Interest-Free Expenditure under Section 36(1)(iii):
The assessee argued that it had sufficient interest-free funds and did not need to borrow for the new business. The Court, however, found that the assessee failed to demonstrate this to the AO’s satisfaction. The authorities held that the investment in the new business was capital in nature and the business had not yet started, making the interest on borrowed capital non-deductible under the proviso to Section 36(1)(iii).

Conclusion:
The Court answered the substantial questions of law in favor of the assessee regarding the depreciation on windmills but in favor of the Revenue regarding the disallowance of interest on investment expenditure for the new line of business. The appeal was partly allowed with no order on costs.