2015 (5) TMI 650 - AT - Income Tax

Allowance of balance 50% additional depreciation u/s 32(1)(ii) - new plant and machinery, purchased and put to use for less than 180 days in the immediately preceding year - Held that - This issue was considered by the Delhi Bench of this Tribunal in the case of Cosmo Films Ltd. (2012 (9) TMI 281 - ITAT DELHI), wherein considering the provisions of section 32(1)(iia) and second proviso to section 32(1)(ii) of the Act found that when there is no restriction in the Act to deny the benefit of balance 50%, the assessee is entitled for the balance additional depreciation in the subsequent assessment year. Since the issue is squarely covered by the decision of coordinate Bench, cited supra, we are of the considered view that the assessee is entitled for additional depreciation u/s. 32(1)(iia) of the Act in these assessment years also. We direct the AO accordingly. - Decided in favour of assessee. Disallowance u/s.14A - whether CIT(A) erred in not deleting the disallowance treated by ld. Addl. CIT as expenses attributable to earning Dividend income and did not hold that no expenses have been incurred to earn the said income - Held that - The assessee company is engaged in the business of manufacturing and sale of cables and cable wires. The assessee company has held shares purchased in earlier periods as investment and now the AO has to find out that the shares held by the company has been purchased out of its own fund or out of loans taken by the assessee. In case, the AO wants to disallow the interest he has to establish the nexus that the loan taken on which interest payment is made is invested in purchase of shares, by virtue of which it has earned dividend. In term of the above, this issue in both the years is set aside to the file of AO. - Decided in favour of assessee for statistical purposes. Industrial Investment Promotion Assistance - CIT(Appeals) though holding that Industrial Investment Promotion Assistance allowed by the State Govt. is the nature of capital receipt but directing AO for reduce the same from the cost of Fixed Assets for the purpose of computing depreciation by applying the Explanation 10 of Sec. 43(1) - Held that - The subsidy was received in terms of Madhya Pradesh Industrial Investment Promotion Assistance Scheme, 2004 in respect of Technological up-gradation - cum - Expansion project for manufacture of XLPE underground power cables using Vertical Continuous Vulcanization Technology in India. The scheme has been framed with an objective to increase employment and establishing new industrial unit by enhancing new capital investment in the state of Madhya Pradesh.As per the Scheme, the amount of assistance which is to be claimed on yearly basis is determined @ 75% of total Commercial tax (MP VAT CST) deposited (net of Input Tax rebate) in respect of sale of products produced using VCV technology on an yearly basis during the eligibility period. In view of these facts assessee claimed a sum of ₹ 2,61,93,863/- being 75% of the tax deposited (Net of Input tax Rebate) for the year under consideration in respect of sale of XLPE Underground Power Cables using VCV technology as capital receipt for the reason that the overall limit of exemption is linked to the fixed capital investment and is in the nature of subsidy for setting up a new unit / expansion of existing unit. The subsidy received as above, is in the nature of capital receipt and CIT(A) has rightly held so. On this issue we confirm the order of CIT(A). In view of the above facts and circumstances of the case and legal position explained by Hon'ble Supreme Court in the case of P. J. Chemicals Ltd. (1994 (9) TMI 1 - SUPREME Court), we are of the view that subsidy receipt should not be reduced from the actual cost of fixed assets for computing depreciation under the provisions of the Act. - Decided in favour of assessee. Exemption of claim for Entry Tax - CIT(A)not directing the AO to treat it as capital receipt - Held that - Ld. counsel for the assessee could not establish that how this is equivalent to the Industrial Investment Promotion Assistance, the scheme of Govt. of Madhya Pradesh. We find no infirmity in the order of CIT(A) and the same is confirmed. - Decided against assessee. Disallowance of provision for leave liability in terms of clause (f) of section 43B - Held that - Remit this issue back to the file of AO to decide afresh in term of the decision of Hon'ble Supreme Court in the case of Exide Industries Ltd. 2008 (9) TMI 921 - SUPREME COURT - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:

1. Allowance of balance 50% additional depreciation under Section 32(1)(ii) of the Income-tax Act, 1961.
2. Estimated disallowance under Section 14A of the Income-tax Act for expenses attributable to earning dividend income.
3. Treatment of Industrial Investment Promotion Assistance as capital receipts and its impact on the cost of fixed assets for computing depreciation.
4. Treatment of exemption of Entry Tax as capital receipt.
5. Disallowance of provision for leave encashment under Section 43B(f) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Allowance of Balance 50% Additional Depreciation:

The first issue revolves around the allowance of the balance 50% additional depreciation under Section 32(1)(ii) of the Income-tax Act for new plant and machinery used for less than 180 days in the previous year. The assessee claimed additional depreciation for the subsequent year, which was disallowed by the AO. The CIT(A) confirmed the AO's action, stating that depreciation is restricted to half the rate if the asset is used for less than 180 days. The Tribunal, however, referred to the decision in Birla Corporation Ltd. Vs. DCIT, where it was held that the assessee is entitled to the balance 50% additional depreciation in the subsequent year. The Tribunal directed the AO to allow the additional depreciation accordingly.

2. Estimated Disallowance Under Section 14A:

The second issue concerns the disallowance of expenses under Section 14A attributable to earning dividend income. The AO applied Rule 8D and disallowed Rs. 1,54,73,515/-. The CIT(A) upheld the AO's decision, relying on the judgment in Dhanuka & Sons Vs. CIT. The Tribunal noted that the AO and CIT(A) did not examine the nexus between the investments and the loans. The Tribunal remitted the issue back to the AO for re-verification, directing the AO to establish the nexus between the loan taken and the investment in shares.

3. Treatment of Industrial Investment Promotion Assistance:

The third issue involves the treatment of Industrial Investment Promotion Assistance received from the Madhya Pradesh State Government. The assessee treated it as a capital receipt, while the AO considered it revenue. The CIT(A) treated it as a capital receipt but directed the AO to reduce it from the cost of fixed assets under Explanation 10 to Section 43(1). The Tribunal upheld the CIT(A)'s decision to treat the assistance as a capital receipt, referring to the Supreme Court's decision in CIT vs. Ponni Sugars and chemicals Ltd. However, the Tribunal disagreed with the reduction from the cost of fixed assets, stating that the subsidy was not directly or indirectly used to acquire any specific asset. The Tribunal held that the subsidy should not be reduced from the actual cost of fixed assets for computing depreciation.

4. Treatment of Exemption of Entry Tax:

The fourth issue is the treatment of the exemption of Entry Tax as a capital receipt. The assessee claimed the entry tax as a deduction without routing it through the P&L Account. The AO added the amount back, and the CIT(A) confirmed the AO's action. The Tribunal found that the assessee could not establish how this exemption was equivalent to the Industrial Investment Promotion Assistance scheme. The Tribunal upheld the CIT(A)'s decision, treating the exemption of Entry Tax as a revenue receipt.

5. Disallowance of Provision for Leave Encashment:

The fifth issue pertains to the disallowance of provision for leave encashment under Section 43B(f). The AO disallowed the provision, and the CIT(A) upheld the disallowance. The Tribunal noted that the issue is pending before the Supreme Court in the case of Exide Industries Ltd., where the judgment of the Calcutta High Court has been stayed. The Tribunal remitted the issue back to the AO to decide afresh in light of the Supreme Court's decision in the Exide Industries Ltd. case.

Conclusion:

The appeals of the revenue were dismissed, and the appeals of the assessee were partly allowed. The Tribunal provided detailed directions on each issue, emphasizing the need for re-verification and adherence to judicial precedents. The judgment underscores the importance of examining the nexus between investments and loans, the purpose of subsidies, and the specific provisions of the Income-tax Act.