2010 (12) TMI 879 - AT - Income Tax

Disallowance - Closure of unit or closure of business - the closure of Kavesar unit had no impact on the main business of the Assessee company viz. that of manufacture of paints - whether various activities carried on by the Assessee constitute the same business or separate business no single test can be devised as universal and conclusive - held that - alternative claim of the Assessee that expenses incurred to protect a business asset should be allowed as deduction - the claim for depreciation is also directed to be allowed - In the result the ground of appeal of the revenue is dismissed while that of the Assessee is partly allowed Regarding disallowance u/s 14A - specific plea has been taken by the assessee before the Assessing Officer that no expenses were incurred by the assessee for earning the tax free income - As rightly contended on behalf of the assessee the assessee should not be put in more disadvantageous position in the set aside proceedings before the Assessing Officer. The Assessing Officer will take into consideration all aspects and compute the disallowance to be made under section 14A of the Act - Appeal is allowed for statistical purpose

Summary

Issues Involved:
1. Deduction of expenses related to the Kavesar factory.
2. Depreciation on assets of the Kavesar factory.
3. Adhoc disallowance of expenses under section 14A of the Income Tax Act.

Detailed Analysis:

1. Deduction of Expenses Related to the Kavesar Factory:
The assessee, engaged in the manufacture of paints and varnishes, claimed expenses of Rs. 35,05,765/- for the Kavesar factory, which had ceased operations from 1/4/1999. The assessee argued that the expenses should be allowed as deduction due to the interconnection and interdependence between the Kavesar factory and other units. The Assessing Officer (AO) rejected this claim, citing that the Kavesar factory was a distinct business and the expenses related to a business that ceased to exist. The CIT(A) allowed part of the expenses amounting to Rs. 30,39,460/-, but disallowed other expenses and depreciation. The Tribunal upheld the CIT(A)'s decision, allowing expenses incurred to protect a business asset but disallowing expenses related to a closed unit.

2. Depreciation on Assets of the Kavesar Factory:
The assessee claimed depreciation of Rs. 1,90,225/- on the assets of the Kavesar factory. The AO disallowed this claim, stating that the assets were not used for business purposes during the previous year. The CIT(A) upheld this disallowance. However, the Tribunal allowed the claim for depreciation, reasoning that the assets formed part of the block of assets and their use was not relevant for allowing depreciation.

3. Adhoc Disallowance of Expenses Under Section 14A:
The assessee earned tax-free income and argued that no expenses were incurred to earn this income, thus no disallowance under section 14A should be made. The AO made an adhoc disallowance of 5% of the exempt income, amounting to Rs. 13,25,892/-. The CIT(A) reduced this to 2.5%. The Tribunal directed the AO to re-examine the issue, emphasizing that the disallowance should be reasonable and in line with the Bombay High Court's directions in Godrej and Boyce Manufacturing Co. Ltd. vs. DCIT.

Conclusion:
The Tribunal partly allowed the appeal of the assessee and treated the revenue's appeal as partly allowed for statistical purposes. The decision highlighted the principles of interconnection and the treatment of expenses and depreciation related to closed business units, as well as the reasonableness required in disallowances under section 14A.