IN INCOME TAX APPELLATE TRIBUNAL , B BENCH, CHENNAI BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./I.T. A. Nos.1834 & 1835/Mds/2016 ( / Assessment Years: 2011-12 & 2012-1 3) M/s. C.Subba Reddy, HUF Vs Joint Commissioner of Income Sukrit, 19/1, Third Cross Street, Tax, R.A.Puram, Chennai-600 028. Non-Corporate Range-1, Chennai. PAN: AACH C2523G ( /Appellant) ( /Respondent) / Appellant by : Mr. S.Sridhar, Advocate /Respondent by : Mr. Supriyo Pal, JCIT /Da t e of h e ar in g : 8th September, 2016 /D at e of Pr on oun c em ent : 6th October, 2016 / O R D E R Per A. Mohan Alankamony, AM:- These two appeals are filed by assessee aggrieved by separate orders of learned Commissioner of Income Tax (Appeals)-2, Chennai both dated 30.03.2016 in ITA No.187 & 215/CIT(A)-2/2013-14 & 2014-15 passed under section 143(3) r.w.s. 250(6) of Act. 2. assessee has raised several grounds in its appeals, however, crux of common issues are as follows:- 2 ITA No.1834 & 1835/Mds/2016 (i) learned Commissioner of Income Tax (Appeals) has erred in sustaining disallowance of `2,09,61,760/- & `2,51,54,112/- for assessment years 2011-12 & 2012-13 respectively made by learned Assessing Officer in regard to depreciation on windmill. (ii) learned Commissioner of Income Tax (Appeals) has erred in sustaining disallowance of `28,90,163/- & `35,01,361/- for assessment years 2011-12 & 2012-13 respectively made by learned Assessing Officer towards expenses incurred for earning tax free income by invoking provisions of section 14A r.w.r 8D. 3. Brief facts of case are that assessee is HUF filed its return of income for relevant assessment years and case was selected for scrutiny and notice was served on assessee under section 143(2) for both assessment years. Subsequently, assessments were completed by learned Assessing Officer under section 143(3) of Act on 29.03.2014 & 31.12.2014 for assessment years 2011-12 & 2012-13 respectively, wherein amongst certain additions/disallowances, he disallowed depreciation on wind mill and by invoking provisions of 3 ITA No.1834 & 1835/Mds/2016 section 14A r.w.r 8D disallowed expenses incurred for earning tax free income. Ground No.1: Depreciation on windmill:- 4. During course of scrutiny assessment proceedings for assessment year 2011-12, it was observed by learned Assessing Officer that assessee had purchased second hand windmill on 31.03.2011 for Rs.5.24 crores from M/s.St.Johns Freight Systems, Tuticorin and had claimed depreciation @ 40% on entire purchase cost of Rs.5.24 crores. After calling for information under section 133(6) of Act and further examining issue, learned Assessing Officer arrived at conclusion that depreciation claimed by assessee is excessive and Explanation 3 to section 43(1) of Act would be applicable in case of assessee and accordingly assessee would be entitled to claim depreciation at most on written down value of windmill shown in vendor s book. But since assessee had purchased windmill in last day of financial year 2010-11 and did not derive 4 ITA No.1834 & 1835/Mds/2016 any revenue during relevant assessment year, learned Assessing Officer disallowed entire depreciation of Rs.2,09,61,763/-. While arriving at above conclusion, learned Assessing Officer observed as under:- i) original cost of asset to vendor was 6.3 crores on which vendor has claimed depreciation for past four years and WDV as on date of sale was only 26.26 lakhs. ii) windmill generator consisting of huge blades, wind turbines, censors and other sophisticated machinery which involves high technology and that would require high maintenance cost after lapse of four to six years. Hence, sale consideration paid by assessee is exorbitant and unrealistic. iii) Even if modest depreciation of 25% is applied cost of windmill purchased by assessee would not exceed more than 1.5 crores. iv) assessee has purchased windmill at fag- end of fifth year ie., from year windmill was initially installed which shows that intention of assessee was 5 ITA No.1834 & 1835/Mds/2016 not to protect its investment but to reduce its incidence of tax burden as assessee was earning healthy profits from its real estate business. v) assessee has been availing benefit of section 80IB of Act till preceding assessment year 2010-11 and since during relevant assessment years such benefits were not available assessee had sought to reduce its profit by way of claiming high depreciation. vi) entire object of assessee was to make attempt for tax planning and avoid paying tax. vii) benefit of higher depreciation in case of windmills was brought in Act due to policy of Govt. of India for generating non-conventional energy through wind power. However, in instant case, such rationale was missing defeating very purpose of tax incentive. viii) assessee has not prudently valued windmill comparing its parameters and other specifications. xi) assessee has purchased windmill on last date of financial year 2010-11 and further vendor of 6 ITA No.1834 & 1835/Mds/2016 windmill was in receipt of revenue generated by windmill until 31/03/2010 which shows that during relevant assessment year assessee has not earned any revenue from asset purchased. Therefore it is obvious that assessee has not put asset to use during relevant assessment year and hence not entitled to benefit of entire depreciation claimed of Rs.2,09,61760/-. xii) For assessment year 2012-13 it was held that in absence of determination of closing WDV as on 31-03-2011, no depreciation is allowable. 5. On appeal, learned Commissioner of Income Tax (Appeals), endorsed view of learned Assessing Officer and justified applicability of Explanation 3 to section 43(1) of Act. 6. Before us, learned Authorized Representative submitted paper book of 1 to 75 pages containing invoices issued by St.Johns Freight Systems Ltd., for sale of windmill to assessee for Rs.5,20,00,000/- (page No.24), 7 ITA No.1834 & 1835/Mds/2016 sale deed for purchase of land on which windmill is erected for Rs.8.00 lacks and related invoice for same amount (Page no.12 to 23 and 25), statement showing energy generation through windmill issued by Tirunelveli Electricity Distribution Circle of TANGEDCO Ltd., for period 31.03.2011 to 20.04.2011 and various other documents to establish that assessee has purchased windmill incurring cost of Rs.5.24 crores and assessee has put windmill to use from 31.03.2011 ie., during relevant to assessment year 2011-12 onwards. learned Authorized Representative further submitted that windmill was purchased only after assessing value of asset. Hence it was submitted that assessee has not resorted to any device for avoiding tax. He further argued stating that approach of learned Assessing Officer is highly arbitrary and unreasonable and invoking Explanation 3 to section 43(1) of Act is devoid of merit. He therefore, pleaded that assessee may be allowed benefit of depreciation as claimed. 8 ITA No.1834 & 1835/Mds/2016 7. learned Departmental Representative on other hand, argued in support of orders of Revenue reiterating stand taken by them. 8. We have heard rival submissions and carefully perused materials available on record. From facts of case, we do not find any merit in orders of Revenue because of following reasons:- i) Revenue has not brought out any cogent materials to show that value of windmill is less than what was paid by assessee other than citing reasons that windmill is several years old, vendor of windmill had claimed depreciation and in his books of account WDV is only Rs.26.26 lakhs. ii) learned Assessing Officer heavily relied on hypothesis that transaction would bring prejudice to Revenue because assessee would be claiming benefit of depreciation once again when same was exhausted by vendor of windmill. But fact remains that Revenue will not be losing tax because as 9 ITA No.1834 & 1835/Mds/2016 per section 50 of Act sale proceeds of windmill has to be reduced from block value of assets of vendor. Thus though assessee will be enjoying benefit of depreciation to that extent vendor will have to forego benefit of depreciation and also liable to short term capital gain tax. iii) learned Assessing Officer has also not made independent assessment on value of windmill or obtained valuation report to arrive at his conclusion. iv) From documents produced by assessee it is evident that windmill was purchased on 31.03.2011. v) Further from documents produced by assessee it is evident that wind mill was put to use from 31.03.2011 because electricity distribution circle of TANGEDCO Ltd., has certified vide its letter No. SE/TANGEDCO/TIN/ AD/REV/A/3D/677 dated 30.04.2011 (page 40 of paper book) 9. From above, it is evident that transaction of purchase of wind mill is genuine and apprehension of learned Assessing Officer that allowing claim of 10 ITA No.1834 & 1835/Mds/2016 depriciation would be prejudice to interests of Revenue is incorrect. From entire facts of case, it is further clear that Revenue has arrived at its decision based only on presumption and belief that it is colourable device adopted by assessee for avoiding tax which is also incorrect. It is pertinent to mention here that there is no bar on assessee to legitimately arrange itself in such manner so as to reduce its tax liability. From facts and circumstances of case, we are of considered view that assessee is entitled for benefit of depreciation on cost of asset of Rs.5.24 crores towards its purchase of windmill from assessment year in which wind mill was purchased viz., assessment year 2011-12 onwards. Therefore, we hereby direct learned Assessing Officer to grant benefit of depreciation to assessee as claimed by him in both assessment years which is in accordance with law. Thus, this issue is decided in favour of assessee. 11 ITA No.1834 & 1835/Mds/2016 Ground No.2: Disallowance u/s.14A r.w.r 8D: 10. During course of scrutiny assessment proceedings it was noticed by learned Assessing Officer that assessee had made investments in shares/mutual funds etc. amounting to Rs.51,03,73,845/- as on 31.03.2011 and assessee had not made any disallowance under section 14A r.w.r 8D of Act. learned Assessing Officer opined that assessee would have certainly incurred expenditure for earning exempt income which is required to be disallowed as per provisions of section 14A r.w.r 8D of Act. Therefore, invoking provisions of section 14A computed expenditure that is to be disallowed applying 8D of Rules and accordingly disallowed Rs.28,90,163/- and Rs.35,01,361/-. 11. On appeal, learned Commissioner of Income Tax (Appeals) relying on decision of Special Bench of Tribunal in case of ITO., Mumbai Vs. Daga Capital Management P.Ltd., reported in 117 ITD 169, M/s. Gordrej & Boyce Manufacturing Ltd., and decision of Chennai 12 ITA No.1834 & 1835/Mds/2016 Bench of Tribunal in case of Super Auto forge Ltd. Vs. CIT reported in 66 Taxman.com 110 concurred with view of learned Assessing Officer by upholding his decision. 12. Before us, learned Authorized Representative submitted that assessee is HUF and has not incurred any expenditure for earning exempt income. He further submitted that entire activities regarding investment were made by Karta and coparceners of HUF and therefore there was no cost incurred for managing portfolio. 13. learned Departmental Representative on other hand relied in orders of Revenue authorities and argued in support of same. 14. We have heard rival submissions and carefully perused materials available on record. It is apparent from facts of case that assessee is HUF wherein Karta and coparceners of HUF manages assets 13 ITA No.1834 & 1835/Mds/2016 directly. These individuals manage portfolio in their personal capacity and therefore no expense can be presumed to be incurred for managing portfolio of investments. For invoking provisions of Section14 of Act there should be prima facie finding by Revenue that assessee would have incurred certain expenditure which does not form part of total income under Act. In present case before us there is no such finding by Revenue. In this situation, we are of considered view that provisions of section 14A of Act cannot be invoked and accordingly disallowance cannot be made by applying 8D of Rules. decisions relied on by Revenue is not applicable to case of assessee which is HUF being managed directly by Kartha and coparceners and there is no finding that assessee has incurred any expenditure for earning exempt income. Therefore, we hereby direct learned Assessing Officer to delete addition made by invoking provisions of section 14A r.w.r 8D for both assessment years. 14 ITA No.1834 & 1835/Mds/2016 15. In result, both appeals of assessee are allowed. Order pronounced in open court on 6th October, 2016 Sd/- Sd/- ( ) ( . ) ( Duvvuru RL Reddy ) ( A. Mohan Alankamony ) /Judicial Member / Accountant Member /Chennai, /Dated 6th October, 2016 somu /Copy to: 1. Appellant 2. Respondent 3. ( )/CIT(A) 4. /CIT 5. /DR 6. /GF C.Subba Reddy, HUF v. Joint Commissioner of Income-tax, Non-Corporate Range-1, Chennai