2015 (10) TMI 2429 - AT - Income Tax

Disallowance of additional depreciation u/s. 32(1)(iia) - Held that - The claim of assessee in respect of additional depreciation has been denied by the AO on the ground that the assessee is not in the business of manufacture or production of goods or articles. Though the AO has recorded this fact that the assessee is in the activity of excavation, crushing and screening of iron ore, but such activity has been carried out by the assessee on behalf of the mine owners. Thus, the AO was of the view that assessee is not entitled for additional depreciation. Apart from this finding, the AO has not examined the source of revenue earned by the assessee from various activities and whether the assessee is doing this activity of excavation, crushing and screening of iron ore by purchasing the iron ore and then selling the same, or it was on contract basis on behalf of other parties. - this issue requires a proper verification and examination of relevant facts at the level of the Assessing Officer and then, adjudication as per law - Decided in favour of assessee by way of remand. Disallowance u/s. 40(a)(ia) - assessee has paid interest/financial charges without deduction of tax as required u/s. 194C - Held that - This issue is decided in favour of the assessee. The disallowance made by the AO u/s. 40(a)(ia) of the Act is deleted. See case of Merilyn Shipping 2012 (4) TMI 290 - ITAT VISAKHAPATNAM concluding that provisions of Section 40(a)(ia) are applicable only to the amounts of expenditure which are payable as on the date 31st March of every year and it cannot be invoked to disallow expenditure which has been actually paid during the previous year, without deduction of TDS. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of additional depreciation under Section 32(1)(iia) of the Income Tax Act.
2. Disallowance of finance charges under Section 40(a)(ia) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Additional Depreciation under Section 32(1)(iia) of the Income Tax Act:
The assessee, engaged in the business of trading in iron ore and mining activities such as excavation, crushing, and screening, claimed additional depreciation on plant and machinery amounting to Rs. 90,55,120. The Assessing Officer (AO) disallowed the claim, stating that the assessee was not engaged in the business of manufacturing or production of articles or goods, as required under Section 32(1)(iia). The AO's view was that the assessee's activities were contract-based and did not qualify as manufacturing. The CIT(Appeals) upheld this disallowance.

Before the Tribunal, the assessee argued that its activities fell within the ambit of "manufacture" and cited a decision by the Tribunal in the case of ACIT v. R. Prabhu, which held that similar activities qualified as manufacturing. The Department Representative (DR) countered that the AO's factual finding indicated that the assessee was not in the business of manufacturing and that it was unclear whether the new machinery was used for qualifying activities.

The Tribunal noted that the AO had not thoroughly examined the source of revenue or whether the new machinery was used for the activities claimed. The Tribunal referenced the decision in R. Prabhu, which supported the assessee's claim if the machinery was used for qualifying activities. Consequently, the Tribunal set aside the issue for re-examination by the AO to verify the relevant facts and adjudicate afresh.

2. Disallowance of Finance Charges under Section 40(a)(ia) of the Income Tax Act:
The AO disallowed Rs. 1,04,09,238 paid as interest/financial charges due to non-deduction of tax at source under Section 194C. The CIT(Appeals) confirmed this disallowance.

The assessee contended that Rs. 24,972 paid to Sundaram Finance Ltd. was exempt from TDS due to a certificate under Section 197(1), and the payments to SREI Infrastructure Finance Ltd. and Tata Motor Finance Ltd. were fully paid before the end of the financial year, invoking the decision in Merilyn Shipping Corporation & Transports, which held that Section 40(a)(ia) does not apply to amounts already paid.

The Tribunal found that the payment to Sundaram Finance Ltd. was indeed exempt from TDS and deleted the disallowance for this amount. For the remaining payments, the Tribunal referenced the decision in Ananda Marakala, which followed the Special Bench decision in Merilyn Shipping Corporation & Transports, supporting the assessee's claim that Section 40(a)(ia) applies only to amounts payable at the end of the year. The Tribunal decided in favor of the assessee, deleting the disallowance for the remaining payments.

Conclusion:
The appeal was partly allowed. The issue of additional depreciation was remanded to the AO for re-examination, while the disallowance of finance charges was deleted based on the Tribunal's findings and relevant judicial precedents.