2010 (3) TMI 940 - AT - Income Tax

Summary

Issues involved: Assessment of depreciation on windmill system for the assessment year 2006-07.

Assessment of depreciation claim by Assessing Officer:
The Assessing Officer disallowed the claim of depreciation on the windmill system amounting to Rs. 41,83,360, as he concluded that the windmill was not commissioned by the end of the relevant previous year, despite the assessee's explanation that the windmill had effectively been commissioned and was producing energy. The Assessing Officer determined the total income at Rs. 46,84,565 based on this disallowance.

First appeal before Commissioner of Income-tax (Appeals):
The Commissioner of Income-tax (Appeals) allowed the appeal of the assessee, relying on the doctrine of "passive use" as established in previous cases. He held that since the windmill system was "ready to use," depreciation should be legitimately allowed, even though actual production of electricity was not clearly established by the assessee.

Second appeal before Appellate Tribunal ITAT BANGALORE:
The Revenue challenged the decision of the Commissioner of Income-tax (Appeals) on various grounds, arguing that the windmill was not operational, invoices were dated after the relevant period, and actual electricity production was not proven. The Tribunal noted that the Commissioner had only allowed depreciation based on "passive use" and not on actual production of electricity. The Tribunal emphasized the distinction between passive use in an existing business versus a new business, stating that in this case, where the windmill was set up for a new business, depreciation could only be allowed upon actual commencement of business and actual use of the windmill system.

Decision of the Tribunal:
The Tribunal set aside the Commissioner's order and restored the Assessing Officer's decision to disallow depreciation on the windmill system. The Tribunal held that since there was no actual commencement of business and no actual use of the windmill system, the concept of "passive user" could not apply. The Tribunal could not consider extended arguments from the assessee as no appeal or cross-objection was filed against the Commissioner's order. The appeal filed by the Revenue was allowed, and the order was pronounced on March 29, 2010, in Bangalore.