By TIOL News Service

ERNAKULAM, JAN 27, 2018: THE ISSUE is - Whether evacuation of land for installation of wind turbine generators does not amounts to act of improvement of land and therefore, administrative charges paid for such an act is an allowable deduction as 'depreciation'. YES is the verdict.

Facts of the case

The Assessee-a public limited company, established windmills in Tamilnadu. The Assessee had filed its return for the relevant AY declaring a total income. Accordingly, the AO completed the assessment. Further, the AO noted that the Assessee had advanced loans against the gold ornaments pledged with it. Therefore, notice u/s 148 was issued to the Assessee. During the re-assessment proceeding, the AO noted that in 2005-06, the Assessee had purchased three windmills or Wind Turbine Generators and they cost it Rs. 18,05,98,860. Out of the said amount, the Assessee paid a certain amount to M/s Shubh Realty (South) Pvt. Ltd for erecting the three windmills and towards Infrastructure Development Charges (IDC) paid to Tamil Nadu Electricity Board (TNEB). The Assessee added all the said expenditure to the cost of wind mills and claimed depreciation. The AO treated the amount paid to TNEB for IDC also towards the cost of land and disallowed depreciation. During the same AY, the Assessee had entered a new line of business by obtaining a licence for operating an FM Radio. The Assessee had paid a certain amount towards licence fee to the Ministry of Information & Broadcasting and Bharati. The Assessee had its own funds but the AO assumed that the Assessee had borrowed capital for starting the new-line of business. Thus, the AO disallowed 10% of the expenditure on the new-line of business. On appeal, the CIT(A) affirmed with the findings of the AO. On further appeal, the Tribunal held that the debit notes produced by the Assessee revealed that the amounts were paid towards IDC representing infrastructure development charges. Therefore, the Assessee's appeal was dismissed.

On appeal, the High Court held that,

++ from the debit notes and the TNEB's communication, one cannot help concluding that the amount was spent on developing the infrastructure of the Wind Turbine Generators. In these documents, the red herring that led the authorities seems to be the expressions such as "registration", "processing", "supervision". So they concluded that the entire expenditure was towards land development. Regrettably, TNEB has nothing to do with the registration of land, much less with its development or processing. Neither the record reveals nor the Revenue asserts that the Assessee purchased the land from TNEB. That accepted, the land registration lies with the Revenue, and its development with any other person or entity than TNEB. From the record, this Court found that the Assessee paid the charges for "evacuating the land". This is another red herring, so to say. Indeed, lexically to evacuate is to withdraw or depart from; vacate. American Heritage Dictionary (5th Ed.) gives these additional meanings: to excrete or discharge of waste from (the bowl, for example); to empty or remove the contents of (a closed space or container);

++ the subject of a letter the Assessee wrote to Shubh Reality, reads: "arranging land and TNEB evacuation for 3 nos. 1250 KW WTG" but the body of the letter does not refer to TNEB's evacuating the land. In the letter, the Assessee merely asks Shubh Reality to arrange "for the land (a prox. 2 acres per WTG)". The Assessee also requires Shubh Reality to "pay Infrastructure Development Charges (IDC) @ Rs. 32.30 lakh per WTG" to TNEB. Therefore, the Tribunal's concluding that the expenditure was "more in the nature of administrative charges paid for getting permission for use of land/evacuation of land for unhindered space and hence the payment of NOC and registration" cannot be sustained;

++ to install the wind turbine generators, the Assessee must have excavated some earth on the land it purchased. Such excavation, does not amount to improving the land; rather, it amounts to a preparatory step for erecting the wind turbines. Therefore, the land evacuation, if any, must be taken as part of infrastructure development for establishing the windmills. Therefore, this Court held that the AO and both the appellate authorities have misread and misapplied the evidence, and that has led to the perversity of findings. This Court believes it to be a judicially reviewable error and accordingly set aside the Tribunal's finding on the depreciation. As a result, the depreciation of Rs. 38,76,000 (50% for second half addition) claimed on the windmills was allowed.

(See 2018-TIOL-155-HC-KERALA-IT)