2015 (9) TMI 540 - AT - Income Tax

Disallowance u/s.14A in respect of direct expenditure, including by way of interest on borrowings, in relation to income/s not forming part of the total income - CIT(A) deleted addition in part - Held that - Both the interest cost being allocated, i.e., as between the incomes forming and not forming any part of the total income, as well as the said incomes themselves, it needs to be noted, are for the whole year. This, even otherwise patent, becomes inevitable in the instant case as the assessee neither before us nor before the first appellate authority has made out any case against the disallowance of interest u/s.14A(1) r/w r. 8D(2)(ii). We, accordingly, consider it a serious lapse on the part of the ld. CIT(A) in not so directing the A.O. So much so, in our view, the parties themselves should have pointed out this during hearing, which exhibits or reflects smugness on the part of the assessee and a lack of preparation on the part of the ld. Departmental Representative (DR). We direct accordingly, so that the disallowance of interest u/s.14A r/w Rule 8D(2)(ii) shall be with reference to the interest cost for the entire year, i.e., ₹ 204.52 lacs, and not ₹ 136.35 lacs. As regards our competence to so direct, we rather consider it our bound and duty to do so. Sale of depreciable assets - Disallowance of deprecation - the assessee found favour with the ld. CIT(A) in-as-much as section 50C only applies for computing capital gains arising to the assessee on the transfer of capital assets specified therein, so that the same would have no implication toward computing the WDV of the relevant block of assets - Held that - Section 50C shall apply equally in respect of depreciable assets; it being the assessee s claim in that case that immovable property, the asset class specified in section 50C, would yet not apply in-as-much as the same is a depreciable asset being used for the purposes of its business by the assessee. We are in complete agreement with the ld. CIT(A). The deeming of section 50C is for the limited purpose for computing the capital gains u/s.45 r/w s. 48 on the assets specified under the said section. The only purport of section 50C is the extent of the matter specified therein, providing (to that extent) an alternate basis to that specified u/s.48, for computing the capital gains chargeable u/s.45. The WDV would have to be necessarily computed in terms of section 43(6), and for which section 50C has no application. how we wonder the opening WDV could be altered without first changing the depreciation for the immediately preceding year and, concomitantly, the WDV at the close of that year. The Revenue s case is wholly untenable in law. - Decided against revenue.

Summary

Issues involved:
1. Disallowance of expenses under section 14A of the Income Tax Act, 1961.
2. Disallowance of depreciation under section 50C for computing the WDV of assets.

Detailed Analysis:
1. Disallowance of expenses under section 14A:
The Appellate Tribunal heard cross-appeals by the Assessee and the Revenue regarding the disallowance of expenses under section 14A of the Income Tax Act. The Assessee's appeal contested the disallowance of Rs. 98,66,326, while the Revenue's appeal challenged the deletion of disallowance under section 14A. The Assessee did not contest its appeal and did not press its ground concerning the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii). The Tribunal dismissed the Assessee's appeal and proceeded to analyze the Revenue's appeal, focusing on the disallowance under section 14A read with Rule 8D. The Tribunal found that the disallowance under Rule 8D(2)(i) was not justified as there was no direct nexus between the funds released during non-seasonal months and tax-exempt investments. However, the Tribunal directed an increase in the disallowance under Rule 8D(2)(ii) based on the interest cost for the entire year, rather than a proportionate basis as calculated by the Assessing Officer. The Tribunal emphasized its duty to make necessary adjustments under the law and dismissed the Assessee's appeal while upholding the Revenue's appeal on this issue.

2. Disallowance of depreciation under section 50C:
The Revenue's appeal also contested the disallowance of depreciation based on the application of section 50C for computing the WDV of assets. The Assessing Officer had recomputed the opening WDV of the block of assets due to a sale of assets, but the Assessee claimed that section 50C did not apply to depreciable assets. The Tribunal agreed with the Assessee, stating that section 50C is limited to computing capital gains and does not affect the WDV calculation under section 43(6). The Tribunal dismissed the Revenue's appeal on this issue, upholding the decision of the lower authority. The Tribunal found the Revenue's argument untenable in law and confirmed the decision regarding the disallowance of depreciation under section 50C.

In conclusion, the Tribunal dismissed the Revenue's appeal and disposed of the Assessee's appeal accordingly, providing detailed reasoning for each issue involved in the judgment.