2016 (5) TMI 705 - AT - Income Tax

Grant of higher rate of depreciation @80% on Civil work and portion of installation and commissioning work included in the block of assets of windmill - Held that - Civil work comprising of foundation of the windmill is an integral part of windmill erection. Therefore, the same is eligible for depreciation at the same rate as is applicable in the case of windmill. Similarly, the cost of commissioning and erecting windmill cannot be said to be separate from the windmill as it is directly related to the functioning of the windmill. Therefore, the same rate of depreciation will apply on the cost of commissioning of the windmill. Deduction in respect of cost of civil work which was required for foundation of windmill @ 80% i.e. expenditure incurred on erection and commissioning, including foundation work. The assessee had incurred cost for electrical work including supply and installation of electrical items, labour charges for testing and commissioning out and contribution towards power evacuation infrastructure cost, which were incurred exclusively for running and maintenance of windmill installed and proper functioning of windmill. No infirmity in the order of CIT(A) in allowing the claim of higher depreciation to the assessee - Decided in favour of assessee. Revenue v/s capital expenditure - expenditure on account of mobiles written off - Held that - We find that the Tribunal in Inductotherm (India) Ltd. Vs. DCIT (1999 (6) TMI 45 - ITAT AHMEDABAD-C) had held that unless and until scrap value of the machinery which has been discarded, demolished or destroyed during the previous year is ascertained the same cannot be reduced for the purpose of computing depreciation. In the instant case, the machinery in question was only scraped during the year, that meant it had not been used during the previous year. The scrap value of the same had not been ascertained as yet which would be possible only after selling the same. Therefore, nothing could be reduced at present from the written down value of the block assets and the Tribunal thus, directed the Assessing Officer to allow depreciation as claimed by the assessee on the aforesaid assets. The issue arising before us is similar to the issue before the Ahmedabad Bench of Tribunal in Inductotherm (India) Ltd. Vs. DCIT (supra) and following the same parity of reasoning, we hold that the assessee is entitled to the claim of depreciation on the assets - Decided in favour of assessee. Disallowance on account of interest expenditure - Held that - Though the assessee had during the course of assessment proceedings agreed to the aforesaid addition, but in view of the facts being brought to the notice of CIT(A) and also before us, we find merit in the claim of assessee. Following the same line of reasoning as in assessment year 2008-09, we direct the Assessing Officer to re-compute the interest expenditure in relation to the projects undertaken by the assessee and such interest which is relatable to project, revenue of which has been recognized by the assessee in the year under appeal, then the same is to be allowed as deduction. However, the balance interest expenditure is to be allocated to the projects under construction and the interest has to be capitalized.

Summary

Issues Involved:
1. Higher rate of depreciation on civil work and installation and commissioning work for windmills.
2. Disallowance of capital expenditure of ?3,00,000.
3. Disallowance of interest expenditure of ?32,84,047.

Detailed Analysis of Judgment:

1. Higher Rate of Depreciation on Civil Work and Installation and Commissioning Work for Windmills:
The primary issue raised by the Revenue was the grant of a higher rate of depreciation at 80% on civil work and installation and commissioning work included in the block of assets of windmills. The assessee had claimed depreciation at 80% on these components, but the Assessing Officer (AO) restricted the depreciation to 10% for civil work and 15% for installation and commissioning work, relying on the decision in the case of Poonawalla Finvest and Agro Pvt. Ltd.

The CIT(A) allowed the higher depreciation rate of 80% on both civil work and installation and commissioning work, referencing decisions from the Pune Bench of the Tribunal in the cases of DCIT Vs. Aminity Developers and Builders and Cooper Foundry Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, emphasizing that civil work for the foundation and the cost of commissioning and erecting windmills are integral parts of the windmill itself, thus eligible for the same depreciation rate. This was supported by the functional test and previous rulings, including the Hon'ble Bombay High Court's decision in CIT Vs. Cooper Foundry Pvt. Ltd.

2. Disallowance of Capital Expenditure of ?3,00,000:
The second issue in the Cross Objections was the disallowance of ?3,00,000, classified as capital expenditure for mobiles written off. The AO made this disallowance based on the auditor's report and the assessee's admission. The CIT(A) upheld this disallowance, referencing the principle that no appeal lies against an agreed addition unless coercion or malafide is proven.

However, the assessee contended that it should be allowed depreciation on these assets, citing the Tribunal's decision in Inductotherm (India) Ltd. Vs. DCIT. The Tribunal agreed with the assessee, stating that the scrap value of the machinery must be ascertained before reducing it from the written-down value for depreciation purposes. Consequently, the Tribunal allowed the assessee's claim for depreciation on the written-off mobiles.

3. Disallowance of Interest Expenditure of ?32,84,047:
The third issue was the disallowance of ?32,84,047 as interest expenditure, which the AO capitalized as work-in-progress based on the assessee's admission. The CIT(A) upheld this capitalization, noting that the assessee had agreed to it during the assessment proceedings.

The assessee argued that the interest should be allowed as a deduction in line with the project completion method it followed, as decided by the Tribunal in the assessee's own case for previous years. The Tribunal directed the AO to re-compute the interest expenditure, allowing the interest attributable to completed projects as a deduction and capitalizing the rest. This approach was consistent with the Tribunal's earlier decisions for the assessee's previous assessment years.

Conclusion:
The appeal of the Revenue was dismissed, and the Cross Objections of the assessee were partly allowed. The Tribunal upheld the higher depreciation rate for windmill-related civil work and installation, allowed depreciation on written-off mobiles, and directed a re-computation of interest expenditure in line with the project completion method.