2013 (6) TMI 157 - AT - Income Tax

Disallowance towards interest u/s 14A of the Act read with Rule 8D - Held that - In the absence of any material on record to contradict the findings of the learned CIT(A) the Revenue cannot challenge the order of the CIT(A) merely on the ground that the assessee has not furnished documentary proof that borrowed funds were not utilised for the purpose of investments. The learned CIT(A) also perused the bank documents in regard to the loan/credit facilities given to the assessee. In so far as the credit facility obtained for the purpose of working capital is concerned there cannot be any dispute that interest thereon cannot be attributed to investments made by the assessee and hence computation of disallowance u/s 14A is not permissible thereon. Matter is sent for recomputation of disallowance to AO, if any. Rejection of claim of additional deprecation related to purchase of plant & machinery Revenue appeal - Held that - After perusal of material records and papers it highlights that the freight charges and other charges are directly linked to the purchase of plant and machinery and cannot be delinked. It is not in dispute that normal depreciation was allowed by the AO by treating the impugned expenditure as part of the expenditure incurred on plant and machinery since the impugned expenditure was capitalised and treated as part of cost of plant and machinery. It is also not in dispute that the plant and machinery was used for manufacturing purpose and in fact the AO has allowed additional depreciation on the plant and machinery. Therefore it is illogical to hold that the assessee is entitled to normal depreciation on plant and machinery including freight charges, etc. but with regard to additional depreciation it should not be treated as part of cost of plant and machinery. Therefore, the findings of the learned CIT(A) is justified and upheld. Assessee is entitled for additional depreciation.

Summary

Issues:
1. Disallowance of interest under section 14A of the Act.
2. Disallowance of additional depreciation on freight and other charges related to machinery.

Analysis:

Issue 1: Disallowance of interest under section 14A of the Act:
The appeal pertains to the assessment year 2008-09, where the Revenue challenged the deletion of interest disallowance by the Ld. CIT(A) under Rule 8D. The Revenue contended that the assessee did not provide evidence that borrowed funds were not used for investments, invoking section 14A of the Act. The assessee argued that no interest-bearing funds were utilized for earning tax-free income, supported by the company's substantial net worth compared to investments. The Ld. CIT(A) accepted the assessee's plea, noting that bank loans were for working capital and not investments, aligning with the Bombay High Court's decision in Reliance Utilities Ltd. The Tribunal upheld the CIT(A)'s decision, limiting the relief to interest on working capital loans only, directing the AO to recompute any disallowance accordingly.

Issue 2: Disallowance of additional depreciation on freight and other charges related to machinery:
Regarding the claim of additional depreciation on freight charges related to purchased machinery, the AO rejected the claim, insisting on proof that the expenditure was part of the machinery's installation cost. The assessee argued that the charges were directly linked to the machinery's price and should be considered part of the machinery's cost. The Ld. CIT(A) agreed with the assessee, stating that if normal depreciation was allowed on the machinery, additional depreciation on the related charges should also be permitted. The Tribunal upheld the CIT(A)'s decision, emphasizing that the charges were part of the machinery's cost and thus eligible for additional depreciation. The appeal of Revenue on this ground was dismissed.

In conclusion, the Tribunal partly allowed the Revenue's appeal, upholding the decision on the disallowance of interest under section 14A and the additional depreciation on freight and other charges related to machinery.