2014 (9) TMI 259 - AT - Income Tax

Expenses u/s 14A disallowed Tax free income - Held that - Assessee has earned tax free income during the year and the AO has worked out disallowance u/s 14A following the method prescribed under Rule 8D of the Rules relying upon GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - Rule 8D is applicable from AY 08-09 - prior to assessment 08-09, the A.O has to work out the disallowance on a reasonable basis - some of the investments have been acquired in earlier years thus, the matter is remitted back to the AO for verification and also about the availability of the tax free funds in the year of investments Decided in favour of assessee. Depreciation on vehicles given on lease Held that - As decided in assessee s own case for the earlier assessment year, it has been held that sale and lease back is a continuing transaction addition admitted by both the sides decided in favour of assessee. Reversal of provision for diminution in the value of investment Held that - Before AO, the Assessee s submission was that the provisions for diminution in the value of investment was not claimed as deduction in earlier years and therefore its reversal need not be taxed in the year under review the chart was not before AO and CIT(A) - the factual aspect of the chart needs verification thus, the matter is remitted back to the AO Decided in favour of revenue.

Issues Involved:
1. Disallowance of expenses under Section 14A of the Income Tax Act.
2. Depreciation on vehicles given on lease.
3. Deletion of disallowance of bad debts recovered.
4. Deletion of disallowance on reversal of provision for diminution in value of investments.

Detailed Analysis:

1. Disallowance of Expenses under Section 14A:

During the assessment proceedings, the Assessing Officer (A.O.) noticed that the Assessee had earned exempt income of Rs. 8,36,85,739/- but had not made any disallowance under Section 14A. The Assessee contended that investments were made from own funds, not borrowed funds, and no expenses were incurred to earn the exempt income. However, the A.O. disallowed Rs. 6,13,27,758/- under Section 14A using the methodology prescribed under Rule 8D, which was confirmed by the CIT(A).

The Assessee argued that Rule 8D was applicable from A.Y. 08-09 and not for the year under consideration (A.Y. 07-08). The Tribunal noted that the Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. held Rule 8D applicable from A.Y. 08-09 and that disallowance for prior years should be on a reasonable basis. The Tribunal remitted the issue back to the A.O. to verify the availability of tax-free funds in the year of investments and decide accordingly.

2. Depreciation on Vehicles Given on Lease:

The A.O. disallowed the higher depreciation rate claimed by the Assessee on leased assets (motor buses), following the decision of his predecessor. The CIT(A) upheld the disallowance, citing the Bombay High Court's decision in Kotak Mahindra Finance Ltd., which distinguished between "lease" and "hire."

The Assessee argued that the issue was covered in its favor by previous Tribunal decisions, which allowed higher depreciation on similar facts. The Tribunal, following its earlier decisions in the Assessee's own case, decided the issue in favor of the Assessee, allowing the higher depreciation rate.

3. Deletion of Disallowance of Bad Debts Recovered:

The A.O. added Rs. 9,00,350/- as bad debts recovered, noting that the Assessee's claim for bad debts in A.Y. 05-06 was disallowed and the matter was not final. The CIT(A) directed the A.O. to exclude the amount from the income of the year under reference, noting that the provision for bad debts was not allowed in the earlier year.

The Assessee conceded that the issue should be decided against it since it had already received relief in A.Y. 05-06. The Tribunal upheld the addition made by the A.O., deciding the issue against the Assessee.

4. Deletion of Disallowance on Reversal of Provision for Diminution in Value of Investments:

The A.O. added Rs. 25,73,785/- representing the reversal of provision for diminution in the value of investments, noting that the Assessee's claim for deduction in earlier years was pending appeal. The CIT(A) directed the A.O. to exclude the amount from the income, noting that the provision was not claimed as a deduction in earlier years.

The Assessee submitted a chart showing provisions made and reversals, which was not before the A.O. and CIT(A). The Tribunal remitted the issue to the A.O. for verification of the Assessee's submissions and to decide the issue as per law.

Conclusion:

The Tribunal allowed the Assessee's appeal for statistical purposes, remitting the issues of disallowance under Section 14A and reversal of provision for diminution to the A.O. for verification. The Tribunal upheld the higher depreciation rate for leased vehicles and the addition of bad debts recovered. The Revenue's appeal was partly allowed for statistical purposes, with the issue of reversal of provision remitted to the A.O. for verification.

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