2025 (4) TMI 988 - AT - Income Tax

Restricting depreciation @80% only on assets of Rs. 1, 63, 70, 847/- and @15% on the balance amount - Higher rate of depreciation on solar power generating systems - Classification of HR sections structure for MBSL modules cables etc. - HELD THAT - AO did not examine the full details of the items claimed by the assessee under the head Renewable Energy Devices/Energy Saving Devices and did not give adequate reasons/finding for the treatment of depreciation made in the assessment order. Assessee s claim that the entire amount constitutes Solar Power Generating Systems requires factual verification vis- -vis both with respect to capital goods added and as to whether the other expenses under the head custom duty stamp duty inverter custom duty inverter administrative and other expenses consultancy charges syndicate fee for term loan tour travelling expenses etc. as listed out in the Chart-2 as reproduced on page no.2 of the assessment order will also be part of the Solar Power Generation Systems or not. We therefore set-aside the order of the Ld. CIT(A) and restore the matter to the file of the Assessing Officer for deciding this issue afresh as per law keeping in view of the above observation. Ground no.1 2 3 and 4 of the appeal are allowed for statistical purposes

Summary

The core legal questions considered in this appeal primarily revolve around the eligibility and rate of depreciation allowable on assets claimed by the assessee under the category of Solar Power Generating Systems for the Assessment Year 2012-13. Specifically, the issues are:

1. Whether the Assessing Officer (AO) committed an error, either arithmetical or inadvertent, in restricting depreciation at 80% only on assets worth Rs. 1.63 crores out of total assets claimed under Renewable Energy Devices amounting to Rs. 218.61 crores, without providing opportunity to rectify or correct the figures.

2. Whether depreciation at the rate of 80% can be allowed on assets such as steel structures, street lights, fans, fire-fighting equipment, and other components that have a longer productive life and whether these assets qualify as part of the Solar Power Generating System under the Income Tax Act.

3. Whether the AO erred in allowing 80% depreciation on the cost of buildings inclusive of land, despite land not being a depreciable asset under the Act.

4. Whether expenses such as custom duty, stamp duty, inverter costs, administrative and consultancy charges, fees for term loans, and traveling expenses, capitalized as part of the Solar Power Generating Systems, are eligible for depreciation at 80%, or whether such capitalization and depreciation claims are improper.

These issues are interrelated and concern the classification of assets and expenses for the purpose of claiming depreciation under the Income Tax Act, 1961, particularly the applicability of the higher depreciation rate of 80% prescribed for Solar Power Generating Systems (renewable energy devices) versus the standard 15% rate for plant and machinery.

Issue-wise Detailed Analysis:

1. Alleged Arithmetical or Inadvertent Error by the Assessing Officer in Allowing 80% Depreciation Only on Rs. 1.63 Crores

Legal Framework and Precedents: Section 32 of the Income Tax Act provides for depreciation on tangible assets used for business purposes. The Act prescribes different rates of depreciation for different classes of assets, with Solar Power Generating Systems attracting a higher rate of 80% under the category of renewable energy devices. The AO's role includes verifying the classification and correctness of asset values and depreciation claims.

Court's Interpretation and Reasoning: The AO restricted 80% depreciation to assets worth Rs. 1.63 crores, treating the balance Rs. 216.97 crores as ineligible for the higher rate, primarily on the basis that many items capitalized did not strictly qualify as Solar Power Generating Systems. The AO expressed concern that if all components were allowed 80% depreciation, even unrelated assets like computers and furniture might improperly qualify.

The CIT(A) found this to be a "bonafide error" and "inadvertent," noting that the AO's own query suggested doubt about the classification of certain assets, but the AO failed to adequately consider the integral nature of all components forming the Solar Power Generating System. The CIT(A) held that the AO's addition was made without adequate application of mind and in a hurried manner, thus deleting the addition.

However, the Tribunal observed that the AO had given reasons for his classification and that the CIT(A) did not provide specific reasons or basis for rejecting the AO's finding. The Tribunal concluded that the AO's order was not an inadvertent error but a considered decision requiring factual verification.

Key Evidence and Findings: The AO relied on detailed asset bills and schedules, identifying specific items qualifying for 80% depreciation. The assessee submitted detailed explanations and bills supporting the claim that various components (HR sections, MS structures, cables) are integral to the Solar Power Generating System.

Application of Law to Facts: The Tribunal emphasized the need for factual verification to determine whether the entire amount capitalized qualifies as Solar Power Generating System and is thus eligible for 80% depreciation. The AO's categorization was held to be a reasoned exercise, not a mere arithmetic mistake.

Treatment of Competing Arguments: The assessee and CIT(A) argued for broad inclusion of components under the 80% depreciation category, while the AO and Revenue contended that only specific assets directly forming the generating system should qualify. The Tribunal found the AO's approach more consistent with the statutory scheme but required further factual inquiry.

Conclusion: The issue was set aside for fresh examination by the AO, with directions to provide the assessee an opportunity to be heard and to decide the matter in accordance with law.

2. Eligibility of Depreciation at 80% on Components Such as Steel Structures, Cables, and Other Ancillary Items

Legal Framework and Precedents: The Income Tax Act classifies "Solar Power Generating Systems" as renewable energy devices eligible for 80% depreciation. The term "machinery" and "plant" have been judicially interpreted to include integral components necessary for the functioning of a system. The Privy Council in Corporation of Calcutta v. Chairman Cossipure and Chitpore Municipality recognized that machinery includes component parts which generate power or modify natural forces to achieve a specific result.

The Tribunal also referred to a precedent where interior decoration work used exclusively for business purposes was held to be eligible for depreciation under "plant" rather than as mere furniture.

Court's Interpretation and Reasoning: The CIT(A) accepted the assessee's explanation that steel structures for mounting solar photovoltaic modules, HR sections, and cables are integral parts of the Solar Power Generating System because without them, the system cannot function or generate power. The CIT(A) rejected the AO's narrow view that only certain items qualify.

The Tribunal, however, noted that the AO had raised valid concerns about the inclusion of various expenses and assets that may not strictly be part of the generating system and required further verification.

Key Evidence and Findings: The assessee provided detailed descriptions and bills showing that the components in question are essential to the solar power plant's operation. The AO's selective acceptance of only certain items was challenged as inconsistent.

Application of Law to Facts: The Tribunal acknowledged the principle that all integral components forming a generating system should be included for depreciation at the prescribed rate, but emphasized the need for factual verification regarding the nature of each asset or expense capitalized.

Treatment of Competing Arguments: The Revenue's argument that ancillary items like fans, street lights, and fire-fighting equipment do not qualify for 80% depreciation was noted, but the Tribunal did not conclusively accept or reject this, preferring remand for detailed scrutiny.

Conclusion: The matter was remanded for fresh consideration of whether the assets and expenses capitalized are integral to the Solar Power Generating System and thus eligible for 80% depreciation.

3. Inclusion of Land Cost in Depreciation Claims

Legal Framework: It is settled law that land is not a depreciable asset under the Income Tax Act as it does not suffer wear and tear.

Court's Interpretation and Reasoning: The AO pointed out that the depreciation claimed included cost of land, which is impermissible. However, the CIT(A) did not specifically address this issue in detail.

Findings and Application: The Tribunal noted this ground but did not elaborate further, implying that the issue requires factual verification and proper segregation of land cost from depreciable assets by the AO on remand.

Conclusion: The AO was directed to examine this aspect afresh and ensure land cost is excluded from depreciation claims.

4. Capitalization and Depreciation on Expenses Such as Custom Duty, Stamp Duty, Consultancy Charges, and Administrative Expenses

Legal Framework: Capitalization of expenses must be in accordance with accounting and tax principles. Only capital expenses that form part of the cost of an asset qualify for depreciation. Revenue expenses or expenses not directly attributable to the asset's acquisition or construction are not eligible.

Court's Interpretation and Reasoning: The AO found that the assessee had capitalized various expenses such as custom duty, stamp duty, inverter costs, consultancy, and administrative expenses as part of Solar Power Generating Systems and claimed 80% depreciation thereon. The AO disallowed depreciation on these amounts, treating them as ineligible.

The CIT(A) did not explicitly address this issue but deleted the AO's addition on the ground of inadvertent error and inadequate application of mind.

The Tribunal observed that the AO did not give adequate reasons or findings on the treatment of these expenses and that their inclusion in the Solar Power Generating System requires factual verification.

Key Evidence and Findings: The AO's assessment order detailed the expenses capitalized and questioned their eligibility. The assessee's submissions broadly claimed all such expenses as part of the system.

Application of Law to Facts: The Tribunal emphasized the need for the AO to examine whether these expenses are capital in nature and directly attributable to the Solar Power Generating System, and only then allow depreciation at 80% accordingly.

Treatment of Competing Arguments: The Revenue argued for disallowance of depreciation on these expenses, while the assessee claimed their integral nature. The Tribunal found that the AO's order lacked adequate discussion and directed reconsideration.

Conclusion: The AO was directed to re-examine the nature of these expenses and their eligibility for depreciation on remand.

Significant Holdings:

"There appears to be a bonafide error in this line of thought of the Assessing Officer because by this logic even the solar power generation panels go out of the ambit of depreciation @ 80%."

"The terminology used is Solar power generating systems. The same will include all the components that go into making a system that generates Solar Power."

"An easy test for the same will be by putting up a question 'that in the absence of these components, will the Solar power systems be able to function and generate power?'. The answer to the same shall be 'No'. Therefore, these components are an integral part of the Solar power generating system."

"The Assessing Officer has not challenged or explicitly discussed any other item of expenses capitalized during the year. I find that the addition made is clearly without adequate application of mind and has been made in a hurried and casual manner."

"The Assessing Officer... did not give adequate reasons/finding for the treatment of depreciation made in the assessment order... We, therefore, set-aside the order of the Ld. CIT(A) and restore the matter to the file of the Assessing Officer for deciding this issue afresh as per law keeping in view of the above observation."

The Tribunal established the principle that the classification of assets and expenses for claiming depreciation under the Income Tax Act must be based on detailed factual verification and proper application of mind by the AO. The mere claim of an 80% depreciation rate on all capitalized expenses under the broad head of Solar Power Generating Systems is not automatically permissible without scrutiny.

The final determination on each issue was to remit the matter back to the AO for fresh adjudication with proper opportunity to the assessee, ensuring that only those assets and expenses that are integral and directly attributable to the Solar Power Generating System are allowed depreciation at 80%, while others are to be considered under appropriate categories and rates.