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Infrastructure firm's depreciation claims get a leg-up
February, 16th 2007

In a verdict that would aid infrastructure companies in claiming depreciation allowance, an Income-Tax Appellate Tribunal (ITAT) has held that a company is entitled to depreciation claims if it genuinely owned and operated the property. In short, the ITAT held that if a transaction is genuine, it should get the respective tax benefit. The order was in an appeal filed by Tata Power.

In this case, the deal was registered towards the close of the financial year prompting taxmen to conclude that the power plant purchase was only with the intention of claiming undue depreciation.

However, the ITAT after verifying the facts, decided that the transaction was genuine, and hence the company is entitled to the tax benefit accorded to infrastructure projects. Depreciation allowance in power plant is spread as follows: 80% of the value is exempt in the first year, 80% of the remaining 20% in the following year, and again 80% of the remaining 4% the next year. In this case, Tata Power won the claim of depreciation allowance of Rs 59.65 crore, arising from the use of power plant bought by it from Tata Steel.

Tata Power paid Rs 300 crore for the plant, but the claim of depreciation was disallowed by the I-T department on the ground that the deed of the purchase was registered on March 29, 1997, just before the close of the financial year, and hence there was enough ground to conclude that it was a make believe deal to claim depreciation allowance.

Senior tax lawyer Dinesh Vyas, counsel for Tata Power, argued that the power plant, originally belonging to Tata Steel, was eventually transferred to Tata Power, on account of the latters expertise in running such plants and the paper work regarding completing towards the closure of the financial year was incidental. The plant had become operational from January 22, 1997 and under a MoU executed between the two companies on January 30, 1996. The plant was operated by Tata Power from January 22, 1997.

The MoU was also subject to the approval by Bihar State Government. The Tribunal held that the documentation of transfer of title, which was completed just before the closure of the financial year, is to be treated as a matter of technicality.

The crucial factor that has to be taken into consideration is whether the company has used the asset for the purpose of its business, exercising its power as the owner of the asset. If the assessee has used the asset as its own property entitled to all benefits and answerable to all liabilities and has exclusive rights over the property against the entire world, the claim of depreciation must be allowed even if certain technical aspect of conveyance deed, etc may be pending at the close of the relevant previous year, the ITAT observed.

It held that where the conveyance deed is lawfully executed, its validity can go back to the date of de facto transfer of ownership of the asset.

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