2012 (12) TMI 194 - AT - Income Tax

Additional depreciation u/s 32(1)(iia) Whether assessee can claim additional depreciation u/s 32(1)(iia) on assets given on lease - Assessee engaged in providing P&M on lease - Installation of machines was in the factory of customers AO argued that since assessee is not the actual user of machines therefore not entitled for additional depreciation Held that - There is no dispute that the assessee in this case satisfies both the above conditions of Section 32(1)(iia). The section does not stipulate that the assessee should use the P&M in the business of manufacture or production of any article. Following the decision in case of First Leasing Company Of India Ltd. (1998 (7) TMI 19 - MADRAS HIGH COURT) held that the assessee would be entitled to additional depreciation u/s 32(1)(ii a) on the leased assets. In favour of assessee Deduction u/s 80G Exemption u/s 35(1)(ii) - Assessee has made donation to Auroville Foundation, under the Ministry of HRD - it claimed deduction u/s 35 (1)(ii) - application for renewal of exemption u/s. 35(1)(ii) made by Aravali foundation, was not disposed of by the CBDT - assessee was unable to produce the notification renewing the exemption Assessee made an alternate claim for deduction u/s 80G - Held that - Nevertheless there is violation of Rule 46A, as the CIT(A) has admitted a Certificate dt. 26th October,2010 given by the Foundation, without giving the AO an opportunity to examine the same. Issue remand back to AO Addition on account of excess interest paid u/s 40A(2)(b) - Assessee was paying interest @ 10% to two parties - Whereas it was paying interest at 8% to the Directors of the Company - The difference of 2% was disallowed Held that - AO has failed to make out a case that funds at a lower rate of interest than 10% were available in the market. assessee company has paid interest to banks @ 13%, which is indicative of the fact that the funds were not available in the market at a rate lower than 10%. Issue decides in favour of assessee

Summary

Issues:
1. Claim of additional depreciation of plant and machinery.
2. Allowing deduction under section 80G of the Income Tax Act, 1961.
3. Disallowance of excess interest paid under section 40A(2)(b) of the Income Tax Act, 1961.

Issue 1: Claim of additional depreciation of plant and machinery:
The appellant, a company engaged in manufacturing, trading, leasing, and maintenance of compressors and pumps, claimed additional depreciation of plant and machinery for the AY 2007-08. The AO contended that the transactions were lease transactions, and the assessee was not entitled to additional depreciation. The First Appellate Authority allowed the claim citing relevant Supreme Court decisions. The ITAT held that the conditions for additional depreciation were fulfilled by the assessee, emphasizing that the section did not require the machinery to be used in the business of manufacture or production of any article. The ITAT dismissed the revenue's appeal, relying on case laws supporting the assessee's claim.

Issue 2: Allowing deduction under section 80G of the Income Tax Act, 1961:
The assessee made donations to Auroville Foundation and claimed deduction under section 35(1)(ii) of the Income Tax Act, 1961, which was denied due to non-renewal of exemption. An alternate claim for deduction under section 80G was made, which was allowed by the CIT(A). The revenue contended that additional evidence was admitted without giving the AO an opportunity to examine it, violating Rule 46A. The ITAT upheld the admission of the alternate claim but set aside the issue to the AO for fresh adjudication due to the procedural violation.

Issue 3: Disallowance of excess interest paid under section 40A(2)(b) of the Income Tax Act, 1961:
The dispute involved disallowance of the difference in interest rates paid by the assessee to different parties. The CIT(A) deleted the disallowance, citing market rates and case laws. The ITAT found no infirmity in the CIT(A)'s decision and upheld the deletion of the disallowed amount. The appeal of the revenue was allowed in part, and the ITAT dismissed the appeal on this issue.

Cross Appeals for the AY 2008-09:
The ITAT allowed the claim of additional depreciation under section 32(1)(ii)(a) of the Act for the assessee's appeal. The ITAT dismissed one ground of the assessee's appeal due to non-pressing by the counsel. In the revenue's appeal, a ground related to weighted deduction under section 35(1)(iii) was found to be wrongly taken, and the issue was set aside for fresh adjudication. The ITAT allowed the appeals in part, consistent with the views taken in the previous assessment year.

This comprehensive analysis of the judgment covers the issues related to the claim of additional depreciation, deduction under section 80G, disallowance of excess interest, and the outcomes of the cross-appeals for the AY 2008-09.