2017 (8) TMI 1368 - AT - Income Tax

Expenses relatable to exempt income by invoking the provisions of section 14A r.w.r. 8D - Held that - The investment made by the assessee would be out of the interest free funds available with assessee in the shape of reserve and surplus which is more than the investment in shares and growth of funds from where the assessee has earned this dividend income. We find that this issue is covered by the decision of the Hon ble Bombay High Court in the case of HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT) and hence this issue is decided in favour of assessee. As regards the disallowance of 0.5% of the average value of investment the assessee requested for setting aside the issue to the file of the AO for verification and restricted this disallowance to the extent of investment made in equity from where dividend income is earned and excluded the investment wherein dividend is earned on growth of funds. On this the learned Sr. DR has not objected. We find the plea of the assessee is reasonable and we restore this issue back to the file of the AO Disallowing the depreciation on capital equipments i.e. Wind Energy Generators and Accessories - Held that - assessee purchased 2 (two) Enercon make 800 KW type E-48 wind energy converters and accessories to be installed at site. The installation work was to be completed by 31-12-2006 but there was delay of 15 months and actually installation was done by Ms Enercon (India) Ltd. in March 2008. The assessee received liquidated damages of 20, 59, 600/- during the period FY 2008-09 relevant to AY 2009-10. The assessee credited this amount to its profit and loss account and disclosed the same as income. The assessee never claimed any depreciation and never made any addition to the value of this machinery. The assessee filed complete details in respect to this machinery before us and we could not find that the assessee has claimed any depreciation on the same. Accordingly we are of the view that the lower authorities erred in making addition on wrong premises.- Decided in favour of assessee.

Summary

Issues:
1. Disallowance of expenses relatable to exempt income under section 14A of the Act.
2. Disallowance of depreciation on liquidated damages received.
3. Disallowance of claim of deduction under section 80IA of the Act.

Issue 1: Disallowance of expenses relatable to exempt income under section 14A of the Act:
The AO disallowed expenses related to exempt income by invoking section 14A of the Act and Rule 8D of the Rules. The assessee argued that there was no nexus between the investment in shares and borrowed funds on which interest was paid. Citing the decision of the Hon'ble Bombay High Court in a similar case, the Tribunal ruled in favor of the assessee, stating that the investment was presumed to be out of interest-free funds available with the assessee. The Tribunal directed the AO to verify and restrict the disallowance to the extent of investment made in equity only.

Issue 2: Disallowance of depreciation on liquidated damages received:
The AO disallowed depreciation on liquidated damages received by the assessee for late delivery of wind energy converters. The CIT(A) upheld the disallowance, stating that the effective cost for depreciation purposes should be the total cost reduced by the liquidated damages. However, the Tribunal found that the assessee never claimed depreciation on the machinery in question. Therefore, the Tribunal concluded that the lower authorities erred in making the disallowance and deleted the addition.

Issue 3: Disallowance of claim of deduction under section 80IA of the Act:
The assessee contested the disallowance of a deduction under section 80IA of the Act. During the hearing, the assessee withdrew this ground, citing an assessed gross total loss. The Tribunal permitted the withdrawal and dismissed the ground, clarifying that it should not set a precedent for future cases.

In conclusion, the Tribunal partly allowed the appeal of the assessee, ruling in favor of the assessee on the issues of disallowance of expenses relatable to exempt income and disallowance of depreciation on liquidated damages. The disallowance of the claim of deduction under section 80IA was dismissed as withdrawn.