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TMI Blog2014 (6) TMI 922X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee for depreciation on the value of lease rent paid by including it as part of the plant (windmill) - Held that:- There is no evidence on record to show that there is a technical requirement of erecting the windmills at high altitudes. We will, however, proceed on the assumption that such a technical requirement exists. Even then, in our view, the lease rent paid for acquiring leasehold rights over the land can never be treated as cost of the plant (windmill). The functional test cannot be extended to a case of lease rent for acquiring leasehold rights over the land, whatever be the technical requirement of erecting a plant. The law is well settled that no depreciation is to be allowed on land. By placing reliance on the functional test, it is not possible to allow depreciation on land indirectly. If such a claim were to be allowed, then it could be extended to a case of a land over which a shopping mall is constructed. A shopping mall requires a good area/location, main road for good business. Can it be said that the rent paid for the land over which the shopping mall is constructed is part of the building on which depreciation is to be allowed? In our view, by apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the common order dated 14.09.2012 of the CIT(Appeals), Mysore relating to assessment years 2006-07 to 2008-09. 2. We shall first take up for consideration the appeals by the revenue. ITA No.144/Bang/2013 (AY 2006-07) 3. The assessee is a partnership firm engaged in the business of mining and exports. The assessee installed windmills for power generation. Under section 80IA(4)(iv)(a) r.w.s. 80IA(1) of the Income Tax Act, 1961 (Act), any profits and gains derived by an undertaking which is set up in any part of India for generation and distribution of power after 1.4.1999 will be entitled to a deduction of an amount equal to 100% of the profits and gains derived from such business for ten consecutive assessment years. The above provisions do not refer to the period from when the ten consecutive assessment years will commence for which the deduction will be allowed. Section 80IA(5) provides that the profits and gains of an eligible business shall be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,53,788 21,88,00573 1127 3,77,53,215 3,77,54,342 Book profit as per section 40(b) 1,15,99,74,224 Windmill income (Windmill situated at Shivalinganahalli, Nagatibassapur Huvinahadagali Taluka, Davangere, Karnataka) (Credited directly to partners accounts) Less: Expenses connected to windmill depreciation 63,33,476 18,90,00573 (18,26,67,097) Windmill income (windmill situated at Basavapatna site, Harihar District, Karnataka) Less: Expenses connected to windmill depreciation 1127 2,98,00,000 (2,97,98,873) (21,24,65,970) Gross Total Income 94,75,08,254 Total Income 94,75,08,254 6. It can be seen from the above computation of total income that income of Unit-I on which deduction u/s.80-IA(4)(iv)(a) of the act was claimed at ₹ 63,33,476 was arrived at without setting off the depreciation on windmills in respect of this unit of ₹ 18,90,00,573/. The Assessing Officer examined the aforesaid claim of the assessee and observed that as per the provisions of section 80IA(5) of the Act, the profit from the business of running windmill has to be computed as if such eligible business were the only source of income of the assessee during the previous year. The AO the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tting off against the income of Unit-I & Unit-II in the succeeding assessment years. 8. The CIT(Appeals) accepted the contention of the assessee and following the decision of the Tribunal in the case of Anil H. Lad (supra), held that the direction of the AO to carry forward the loss of Unit-I & Unit-II for setting off against the income of these units in the succeeding assessment years is not valid. 9. We may also clarify here that the computation of income for the A.Y. 2006-07 clearly shows that the unabsorbed depreciation in Unit-I & Unit-II had been fully set off against the income of the other business of the assessee and therefore the entire unabsorbed depreciation of ₹ 21,24,65,970 had been fully absorbed leaving behind nothing to be carried forward. 10. Aggrieved by the aforesaid direction of the CIT(Appeals), the revenue has preferred the present appeal before the Tribunal. 11. We have heard the submissions of the ld. DR, who relied on the order of the Assessing Officer. In our view, the issue is fully settled by the decision of the Hon'ble Karnataka High Court in the case of CIT v. Anil H. Lad in ITA No.176/2001 dated 5.2.2014 which is an appeal against the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue is not compatible with the scheme of gross total income conceptualized in the IT Act, especially in the light of section 80AB which are all relevant while considering the deduction u/s.80IA which is falling under Chapter VIA of the IT Act, 1961. Where the earlier depreciation and losses have already been set off, those loss and depreciation do not go to reduce the gross total income of an assessee within the meaning of section 80AB and therefore bringing the notional concept of carrying forward and set off will be contrary to the scheme of section 80AB and concept of gross total income. 28. Now it is clear as we find that this issue is squarely covered by the above discussed judgement of the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills P. Ltd. v. ACIT (38 DTR 57). Where such an overriding judgement of the constitutional court is governing the issue, we are not permitted to rely on the decision of the Special Bench of the Ahmedabad Tribunal. 29. Therefore, following the above judgement of the Hon'ble High Court of Madras, we accept the contention of the assessee and reverse the order of the Commissioner of Income-tax(A) on this point and di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. The quantum of deduction is to be calculated when the claim for deduction is made. If before claiming deduction, the loss and depreciation claimed by the assessee even in respect of eligible business is setoff against income of the assessee or other source, the said loss or depreciation is already absolved, it does not exist. For the purpose of determining the quantum of deduction under sub-section (5) of Section 80IA, the revenue cannot take into consideration the loss and depreciation which is already setoff against the income of the assessee from other source and compute the profit under Section 80IA. Therefore, the approach of the Tribunal is in accordance with law. The Assessing Authority and the Commissioner committed a serious error in setting off the profit earned by the assessee under Section 80IA against the losses and depreciation of the eligible business which is already setoff from other source before such a claim is putforth. Thus, there is no error committed by the Tribunal in setting aside the order passed by the Assessing Authority as well as the lower Appellate Authority. The substantial question of law is answered in favour of the assessee and against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition that deduction claimed under Chapter VIA should be claimed in the return filed u/s. 139(1) of the Act. Similarly, section 80IA(7) of the Act is also not attracted in this case as the necessary certificates had been duly filed by the assessee and furnished before the AO in the assessment proceedings. Therefore, ground No.2 by the revenue is dismissed. 15. As far as ground No.1 is concerned, the factual background is that, deduction u/s. 80IA had been claimed in respect of Unit-I. In respect of Unit-II and III, there was a loss and therefore no 80IA deduction was claimed. The following was the statement of total income from windmills for the A.Y. 2007-08:- Windmill - I Unit (Windmill situated at Shivalinganahalli, Nagatibassapur Huvinahadagali Taluka, Davangere, Karnataka) (Credited directly to partners accounts) Less: Expenses relating to Windmill 2,57,88,686 Interest on Windmill loan 1,17,69,2887 1,17,69,287 1,40,19,399 Income from Windmill quality for Exemption u/s 80IA 1,40,19,399 Windmill - II Unit (windmill situated at Basavapatna site, Harihar District, Karnataka) Less: Expenses relating to windmill 64,34,506 Insurance 1,05,087 Interest on Loan 22,57,66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad been fully set off against the other business income of the assessee and this is clear from the computation of total income for the A.Y. 2007-08 filed by the assessee before us in which the loss of Unit-II & Unit-III totaling ₹ 33,43,51,857 has been set off against the other income of the assessee from business of ₹ 128,80,97,475. We therefore dismiss ground No.1 raised by the revenue. 20. In the result, the appeal by the revenue is dismissed. ITA No.146/Bang/2013 (AY 2008-09) 21. The grounds raised by the revenue in this appeal for the A.Y. 2008- 09 reads as under:- "1. The learned CIT(A) erred in fact and in law in directing the Assessing Officer to allow the deduction under section 80IA of the Income Tax Act ignoring the provisions of sub-section (5) of section 80IA of the Income Tax Act. 2. The learned CIT(A) erred in fact and in law in directing the Assessing Officer to allow deduction u/s. 80IA of the Income Tax Act claimed by the assessee during the proceedings u/s. 153A of the Income Tax Act even though the conditions of section 80(IA)(7) and 80AC of the Income Tax Act were not fulfilled." 22. For the very same reasons given while dismissing ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bf from AY 2007-08 : ₹ 30,86,23,614 Loss : (-) ₹ 28,39,29,046 Unit-IV: Windmill at Kolahalu Village, Chitradurga Taluk Net loss for the year : (-) ₹ 9,38,97,000 8.5 It is seen that there is no profit for the year from any of the units after set off of the notional loss brought forward from the preceding assessment year. Therefore there is no profit from the windmill sources eligible for deduction u/s. 80IA. Hence, no deduction u/s. 80IA is allowable in the case of he assessee. Therefore, no deduction u/s. 80IA of the Income Tax Act, 1961. The notional losses from these units are to be carried forward." 26. The CIT(Appeals), following the decision of the Tribunal in the case of Anil H. Lad (supra), directed the AO to allow the claim of deduction u/s. 80IA of the Act for Unit-I, Unit-II & Unit-III. He further directed that the loss of Unit-III should not be carried forward for set off of unabsorbed depreciation against income from Unit-IV in the succeeding assessment year. We may also add that unabsorbed depreciation of Unit-IV had already been set off by the assessee against its income from other business of ₹ 326,41,03,558 and therefore there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be equated with the consideration paid for acquiring a plant. According to the revenue, acquiring leasehold rights over a land over a period of 30 years results in an enduring benefit to the assessee and therefore expenditure cannot be allowed as deduction u/s. 37(1) of the Act also. The quantum of lump sum consideration paid for acquiring leasehold rights are different in each of the assessment years. We need not make a reference to those payments as the issue to be decided by us is as to whether payment made for acquiring leasehold rights can be considered as cost of windmill (plant) for allowing depreciation; or whether alternative claim of the assessee to allow the said expenditure as revenue expenditure can be sustained. 29. Both the AO and the CIT(Appeals) decided the issue against the assessee giving rise to these appeals by the assessee for the three assessment years under consideration. 30. The reasons given by the CIT(Appeals) for rejecting the claim of the assessee for depreciation on the value of lease rent paid by including it as part of the plant (windmill) are as follows:- " I have considered the rival contention carefully. It is not a building or structure at w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayer by means of which business activities were carried on, it amounted to a "plant"; but where the structure played no part in the carrying on of those activities but merely constituted a place wherein they were carried on, the building could not regarded as a plant. The Tribunal and the High Court in the instant case proceeded upon assumptions of what a nursing home should contain. This may not be altogether appropriate. What is to be determined is whether the particular nursing home building was equipped so as to enable the assessee to carry on the business of a nursing home therein or whether it is just any premises utilised for that object. We find from the order of the Tribunal as also the assessment order that the assessee's nursing home is equipped to enable the sterilization of surgical instruments and bandages to be carried on. It is reasonable to assume in the circumstances, particularly having regard to the Tribunal's order which states that the sterilization room covers about 250 sq.ft. that the nursing home is also equipped with an operation theatre. In the circumstance, we think that the finding of the High Court should be accepted. We would, however, add that in a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a very careful consideration to the rival submissions. On the issue whether the payment for acquiring leasehold rights on the land on which windmills are erected could be treated as cost of plant on which depreciation can be allowed, we are of the view that the fact that the windmills need to be erected on a high terrain for effective generation of power cannot be the basis to conclude that rents paid for acquiring leasehold rights over the land as part of the cost of plant for the purpose of allowing depreciation. The argument of the ld. counsel for the assessee has been that requirement of erecting the windmill at mountain terrains at a high altitude is a technical requirement for generation of power. Though this contention has not bee disputed by the revenue, there is no evidence on record to show that there is a technical requirement of erecting the windmills at high altitudes. We will, however, proceed on the assumption that such a technical requirement exists. Even then, in our view, the lease rent paid for acquiring leasehold rights over the land can never be treated as cost of the plant (windmill). The functional test cannot be extended to a case of lease rent for acquiri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2008-09 had started Unit-IV at Kolahalu Village. The assessee claimed depreciation on windmill that was commissioned on 28.3.2008. It is not in dispute that the Executive Engineer (Electrical), KPTCL, Chitradurga certified the commissioning of windmill as on 28.3.2008. It is also not in dispute that though the windmill was commissioned and was ready for use, the same was not put to use on or before 31.3.2008. It is in this background that depreciation on the windmill commissioned was claimed. In this regard, the submission of the assessee was that Depreciation of ₹ 9,38,97,000/- was claimed on the windmill for Assessment 2008-2009, in respect of 2 windmills installed during the previous year at a cost of ₹ 18,77,94,000/-. The installation of Windmill was completed on March 28, 2008. Since the asset is ready for use is for period less than 180 days as at the end of the financial year, the assessee entitled to claim the depreciation of 50% of the depreciation rate. For the previous year relevant to Assessment Year 2008-2009, the rate of depreciation on windmill was 80% plus additional depreciation of 20%. Total depreciation claimed was ₹ 9,38,97,000/- ((18,77, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Chamundeshwari Sugars Ltd., 309 ITR 326 (Karn). In Yellamma Dasappa Hospital's case, the Hon'ble High Court took a view that the fact that machinery was kept for ready for use, would alone not entitle the assessee to claim depreciation unless there was actual user of the machinery. This decision pertained to the A.Y. 1989-90. In the case of Chamundeshwari Sugars Ltd., the facts were that machinery was installed before the end of the previous year, but could not be used because it was defective. In such circumstances, the Hon'ble High Court of Karnataka took a view that the assessee was entitled to depreciation by applying the principle of 'machinery being ready to use' and the principle of 'passive user of the asset'. The Hon'ble High Court also followed the decision of the Hon'ble Supreme Court in the case of Liquidators of Pursa Ltd. v. CIT, 25 ITR 265 (SC), wherein the principle of active and passive users was laid down by the Hon'ble Supreme Court. The Hon'ble High Court of Karnataka also distinguished its earlier decision in the case of Yellamma Dasappa Hospital (supra) and held that in that case, no evidence was placed to prove user of the machinery. The CIT(Appeals) prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted, - (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and 47. The term "block of assets" is defined in Section 2(11) of the Act as under:- 2(11) "block of assets" means a group of assets falling within a class of assets comprising - (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed;" 48. Prior to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become an inseparable part of block asset in so far as calculation of depreciation is concerned. The merger of various assets into the block asset can be altered only when the eventuality contained in clause (c) of s. 43(6) takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the 'block asset'. It is thus clear from the aforesaid provisions that the only way by which the written down value on which depreciation is to be allowed as per the provisions of Sec.32(1) (ii) can be altered is as per the situation referred to in Sec.43(6)(c)(i) A and B. 50. The Hon'ble Delhi High Court thereafter held that user of the asset after the concept of block of assets is no longer a requirement for allowing depreciation. The following were the relevant observations. "31. After going through these decisions of the various Benches of the Tribunal and the schematic intention behind the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e look into the provisions of this angle, answer to the argument of the learned counsel for the Revenue predicated on second proviso to s. 32 shall also be provided. It was her submission that if a particular asset is acquired after 30th September during the previous year and is put to use for a period of less than 180 days in the previous year, the deduction under sub-s. (1) of s. 32 is restricted to 50 per cent of amount admissible. On that basis, she had argued that requirement of user of individual asset remains intact. Answer to this argument is that this would be the position in the first year when the particular asset is acquired. With the user, it would meet the requirement of s. 32. In the subsequent years, it is the use of block asset, which becomes the yardstick and not the individual asset already acquired in the earlier years, other than the previous year in which it is first brought into use. 34. In the instant case, the PSL equipment was purchased and put to use by the assessee in previous year relevant to the asst. yr. 1990-91 and the same had entered into the block asset in that year. It, thus, lost individual identity for the allowance of depreciation in that ye ..... X X X X Extracts X X X X X X X X Extracts X X X X
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