THE issues before the Bench are - Whether 'Capital WIP' can be considered as a part of plant and machinary for satisfaction of condition for allowability of deduction u/s 80IA(4)( c) and Whether 'substantial renovation and modernisation' is a neccessary condition for claiming deduction, and it can be realised only by increasing book value of assets by 50%. And the verdict goes against the assessee.
Facts of the case
Assessee is a wholly owned Government of Karnataka Undertaking, engaged in electricity distribution. It had claimed deduction 80-IA(4)(iv)(c) in respect of the profits derived from the distribution of power at 100% of the GTI. To claim deduction u/s.80-IA(4)(iv)( c), assessee had to achieve an increase in the book value of the fixed assets. Assessee contended that it had
achieved the aforesaid increase, therefore it should be allowed deduction. Assessee had contended that capital WIP had to be considered for the purpose of calculating increase in the plant and machinery. However, AO did not agree to this and held that an item of expenditure cannot be said to be an increase in the plant and machinery.
Assessee contended that deduction u/s 80-IA(4)(c) can be allowed to an assessee who 'undertakes' renovation for distribution lines and it was by placing order for purchase of cable and transmission lines and entering into contract for carrying out civil work had undertaken substantial renovation and therefore entitled for deduction. AO argued that there should be “Increase” in the value of plant and machinery in the books of accounts and such increase can be said to be real only when the renovation or modernization is complete and not when the same is in progress.
In an appeal before CIT(A), AR pointed out that it had done contract work as per the guidelines framed by the Ministry of Power for strengthening, upgradation and modernization of existing lines. It was further contended that as per AS 10 issued by the ICAI, accounting for fixed assets, capital WIP for capital expenditure incurred on account of fixed assets has to be separately shown under the gross block of fixed assets. CIT(A), however upheld the decision of AO. Therefore the assessee has appealed to ITAT.
In the appeal before ITAT, AR contended that the CWIP had been certified and in view of the provisions of the aforesaid AS, the same was shown as CWIP, but otherwise it implied that there was substantial completion. It was not the intention of the legislature that the entire renovation and modernisation of the existing lines and cable network had to be completed and put to use, thus the deduction should be allowed to him.
Having heard the parties, the Tribunal held that,
++ there is no doubt that the provisions talk about undertaking substantial renovation and modernisation of existing network of transmission or distribution lines by the electricity distribution company. The Explanation, however, defines what is substantial renovation and modernisation and it lays down that the value of transmission and distribution lines should increase as per the books, at least by 50%. Admittedly, as per the books of account, this criterion was not satisfied. The assessee however seeks to rely on the expenditure incurred during the previous year which were in connection with renovation and modernization of cable and transmission line which were not complete and were in progress and therefore classified as CWIP. The fact that they were shown as CWIP in the books of account would only mean that renovation and modernisation of the existing transmission or distribution lines had not been recognized as complete;
++ we accept the submission of the DR that the provisions of section 80-IA(4)(iv)(c) are meant to encourage modernisation and upgradation of plant & machinery in power sector within a specified period in order to ensure wider network and prevention of transmission losses. This objective is sought to be achieved by prescribing a criterion of increase in the book value of the transmission or distribution lines, which are treated as plant & machinery by the electricity supply company, compared to the book value as on 01.04.2004. We are, therefore, of the opinion that the capitalisation of the expenditure on renovation and modernisation in the books of account is a condition precedent for allowing claim of deduction u/s. 80-IA(4)(iv)(c). The further condition that the same should be put to use, in our opinion is not correct as there is no such condition in those provisions. Such condition is expressly provided for allowing depreciation u/s 32 of the Act. There is no such specific condition in Sec.80-IA(4)(iv)(c) of the Act. Reliance placed by AR on the AS and the reasons for classifying certain items of expenditure as CWIP, cannot be accepted and in any event, the provisions of the Act do not contemplate such expenditure being treated as substantial renovation & modernisation. As already stated above, the expression “undertakes substantial renovation and modernisation” cannot be read in isolation and has to be read along with Explanation to section 80-IA(4)(iv)(c) and if so read, keeping in mind the legislature’s intention behind allowing the deduction, we are of the view that the revenue authorities were justified in holding that the assessee has not satisfied the condition for allowing the deduction.
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