TMI Blog2014 (6) TMI 922X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 applying the functional test, it is possible to contend in all the cases that the land is a tool of trade and has to be regarded as plant o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 which the deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less: Admissible expenses/ items considered separately Income from windmill (credited to Profit Loss account) Total Depreciation as per Income Tax Act Less: Depreciation on windmill (considered separately). 25,65,53,788 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar it was submitted that the Tribunal in the case of Anil H. Lad in ITA No.1262/Bang/2010 dated 7.1.2011, following the decision of the Hon ble Madras High Court in the case of Velayudhaswamy Spinning Mills P. Ltd. v. ACIT, 35 DTR 57, in which it was held that the assessee need not notionally carry forward and set off the loss in respect of the eligible unit, when such loss was incurred in a year earlier to the first year of claim of deduction u/s.80-IA(4)(iv)(a) of the Act. The assessee thus took a stand that in respect of Unit-I Unit-II, deduction u/s. 80IA(4)(iv)(a) of the Act had not been claimed in the past and therefore the past losses of Unit-I Unit-II should not be carried forward for setting 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 cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt has clearly held that where the depreciation and loss of earlier assessment years have already been set off against other business income of those assessment years, there is no need for notionally carrying forward and setting off of the same depreciation and loss in computing the quantum of deduction available u/s.80I. The Hon'ble Court has held further that the year of commencement alone need not be the initial year , but depending upon the facts of the case and the option exercised by the assessee, the year of claim also can be considered as initial assessment year . The court has also examined the issue from a different legal angle and held that the proposition argued by the Revenue 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 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her income of the assessee and the set off against the current income of the eligible business. Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. Fiction created in sub-section does not contemplates to bring set off amount notionally. Fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created. 10. Therefore, keeping in mind the object with which these provisions are introduced, it is clear that an assessee is given the benefit of 100% deduction of the profits and gains from the eligible business. 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 again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. However, it is noticed that for the A.Y. 2007-08 on 19.11.2009 revised statement of total income was filed by the assessee in which deduction u/s. 80IA was claimed. It is also relevant to mention that the assessee had filed its return of income for the A.Y. 2007-08 on 22.10.2007 which was well within the time for filing the return u/s. 139(1) of the Act. Section 80AC of the Act referred to ground No.2 will come into operation only if the assessee does not file the return of income on or before the due date specified u/s. 139(1) of the Act and lays down the consequence that no deduction under Chapter VIA will be allowed in such an event. In this provision, there is no condition 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Loss for the year : (-) ₹ 2,57,28,243 Unit-III: Windmill at Kalakeri Village, Mundargi Taluk Loss for the year : (-) ₹ 30,86,23,614 5.8 It is seen that there is no profit for the year from any of the units. Though there was profit of ₹ 1,40,19,399 from Unit- I, the same has become negative after set off of the same with the notional loss brought forward from the assessment year 2006-07. Hence, no deduction u/s. 80IA is allowable in the case of the assessee for the assessment year under consideration. Therefore, no deduction u/s. 80IA of the Income Tax Act, 1961. The assessee has to notionally carry forward the loss from this source as per provisions of section 80IA(5) of the I T Act. 17. On appeal by the assessee, the CIT(Appeals), following the decision of the Tribunal in the case of Anil H. Lad (supra), directed the AO to allow deduction u/s. 80IA of the Act in respect of Unit-I and further held that the direction of the AO to notionally carry forward the loss u/s. 80IA(5) of the Act for Unit-I Unit-II for being set off against the income of these units in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,46,53,303 Insurance 74,266 Interest on Windmill loan 63,42,777 64,17,043 1,82,36,260 Windmill II Unit (windmill situated at Basavapatna site, Harihar District, Karnataka) Less: Expenses relating to windmill 36,98,787 Interest on Loan 11,91,541 Insurance on Windmill 80,274 12,71,815 24,26,972 Windmill III Unit (Windmill situated at Kalakeri Village,Mudaragi Taluk, Gadag District, Karnataka) Less: Expenses relating to Windmill 4,10,34,438 Insurance 2,13,316 Interest on Windmill loan 1,61,25,554 1,63,38,870 2,46,95,568 Total Income from Windmill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 question of carry forward of loss of windmill Unit-IV. Consequently, this appeal by the revenue is also dismissed. ITA Nos.18 to 20/Bang/2013 (Assessee s appeals) (AY 2006-07 to 2008-09) 27. A common issue arises for consideration in all these appeals by the assessee As we have already seen, the assessee had installed windmills and generated power in all the three assessment years and claimed deduction u/s. 80IA(4)(iv)(a) of the Act. We have also seen that the assessee has been claiming depreciation on windmills in all these assessment years. The assessee had purchased windmills from M/s. Suzlon Energy Ltd. [ Suzlon for short]. According to the assessee, for proper generation of power through windmill turbines, flow of the wind a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 which the business activity is carried out that has been taken on lease by the appellant. Hence, the facts of the case law cited by the appellant in 243 ITR 81 is distinguishable. It is the land that was taken on lease and land by itself cannot be treated as plant and machinery and does not have depreciation rate in depreciation schedule also. 4.3 The alternative argument of the appellant is that the lease amount is revenue expenditure. In the case of HMT Ltd. 203 ITR 820, it was a factory building that was to be returned after the expiry of lease period. Hence, the lease rent is in the nature of rent for plant and machinery. In the case of the appellant, the appellant has obtained the right on land for 30 years on lease whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 case such as this, the Tribunal should proceed upon material placed by the assessee which establishes that the building is specially equipped as a plant for the assessee s business. The appeal is dismissed. No order as to costs. (emphasis supplied) 33. With regard to the alternative contention that the expenditure should be treated as a revenue expenditure, the ld. counsel for the assessee relied upon the decision of the Hon ble Supreme Court in the case of CIT v. Empire Jute Co. Ltd., 124 ITR 1 (SC), wherein the Supreme Court held that the test of enduring benefit may not be relevant in all cases and one has to see the nature of advantage obtained by the assessee in a commercial sense. It is only when the advant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh 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 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 applying the functional test, it is possible to contend in all the cases tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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/- ((18,77,94,000*50%). It was also submitted by the Assessee that there is no requirement under Income-tax Act, 1961 or under any rules made there under that each addition to the asset that needs to generate income to claim the depreciation. The only condition that needs to fulfill to claim the depreciation is asset is put to use for the purpose of the business of the assessee. The Assessee relied on the following decisions for the proposition that the asset is ready for use is enough to claim the depreciation: 1. Commissioner of Income Tax Vs Geo Tech Construction Corporation (200) 244 ITR 452 (Ker) 2. Dineshkumar Gulabchand Agarwal Vs CIT (2004) 267 ITR 768 (Bom) 3. Whittle Anderson Limited Vs CIT (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) preferred to follow the decision of Yellamma Dasappa Hospital. 42. Before the CIT(Appeals), another argument was put forth by the assessee that with the concept of introduction of block of assets, the user of machinery for the purpose of allowing depreciation u/s. 32 has become irrelevant and in this regard, relied on the decision of the Hon ble Delhi High Court in the case of CIT v. Bharat Aluminium Co. Ltd., 187 Taxman 111. The CIT(Appeals), however, did not express any opinion on this argument put forth by the assessee. 43. Aggrieved by the order of the CIT(Appeals), the assessee has raised ground No.2 before the Tribunal. 44. We have considered the rival submissions. The ld. counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 introduction of new concept of block of assets with effect from 01.04.1988, depreciation used to be claimed separately on each asset. The Legislature found that this was a cumbersome procedure leading to various difficulties. This necessitated introduction of the concept of block assets and allowability of depreciation on such a block. The rationale behind such a provision is contained in Circular No.469 dated 23.09.1986 issued by the Central Board of Direct Taxes (CBDT). After referring to the Budget Speech of the Finance Minister wherein reference was made to the proposal to introduce a system of allowing depreciation in respect of block of assets instead of the present system of depreciation on ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions relating to depreciation contained in the aforesaid provisions, we are inclined to affirm the view taken by the Tribunal in the instant case. While doing so, we have in mind the rationale and purpose for which the concept of block asset was introduced by the amendment in the provisions of the Act, as reflected in the Circular dt. 23rd Sept., 1988 of the CBDT. Intention behind these provisions is apparent. Once the various assets are clubbed together and become block asset within the meaning of s. 2(11) of the Act, for the purpose of depreciation, it is one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent 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 year. Since it is not in dispute for the year in question and block of assets was used, the assessee was rightly given the benefit of depreciation in the years in question. The question stands answered against the Revenue. 51. In the light of the aforesaid decision of the Hon ble Delhi High Court, we are of the view that the issue can be decided from this angle and the assessee should be allowed the benefit of depreciation. Admittedly the value of the windmills on which depreciation was claimed by the Assessee entered the block of assets on which depreciation was claimed. The windmills had been installed and acquired by the Assessee. In such circumstances, we are of the view that the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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