2014 (9) TMI 1156 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - disallowance of expenditure us/ 14A related to exempted income - Rate of depreciation on Wind Turbine Generator - Held that - The capital work-in-progress was with regards to the building at Ayali Kalan and the AO has not mentioned even once that this building was not being constructed by the appellant for his business. That being so, no disallowance on this account can be made u/s 36(l)(iii). The disallowance if at all in these circumstances can be made under proviso to section 36(l)(iii). However, for applying the proviso it has to be shown that the appellant had borrowed funds specifically for capital work-in-progress. The AO has not shown that any funds were borrowed for this purpose - Claim of interest paid allowed. Additions u/s 14A r.w.r 8D - Held that - Admittedly the order under appeal is assessment year 2009-10 to which the provisions of Rule 8D are clearly applicable. Similar issue of disallowance under section 14A of the Act read with Rule 8D of the Rules arose before the Tribunal in assessee s own case in assessment year 2008-09 (supra) and the applicability of the said provisions has been upheld. AO directed to recompute the disallowance under section 14A read with Rule 8D(ii) of the IT Rules by following our directions in the order relating to assessment year 2008-09 and in respect of netting of interest - However, the disallowance under Rule 8D(iii) is to be computed in line with the provisions of the Act i.e. % of the average of the value of investment and not at the closing value of the investments. Rate of Depreciation on Wind Turbine Generator - Held that - the power evacuation infrastructure facility is part and parcel of the windmill though partly owned by the assessee on which the assessee is entitled to the claim of depreciation at the same rate on which depreciation was allowed on the windmill. Further the assessee is also entitled to the claim of depreciation at higher rate on the transmission lines which again are part and parcel of the windmill.

Summary

Issues Involved:

1. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Disallowance under Section 14A of the Income Tax Act, 1961.
3. Disallowance of depreciation on Wind Turbine Generator.
4. Charging of interest under Section 234B of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961:

The assessee had purchased land and received loans on which the interest liability was substantial. The Assessing Officer (AO) disallowed the interest under Section 36(1)(iii) since the land was not put to use. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, noting no fresh investment was made in the land and earlier disallowances were deleted by CIT(A) and upheld by the Tribunal. The Tribunal agreed, citing the assessee's own funds were used for investment and no borrowed funds were involved, referencing the Supreme Court's decision in Munjal Sales Corporation Vs. CIT.

2. Disallowance under Section 14A of the Income Tax Act, 1961:

The AO made disallowances under Section 14A read with Rule 8D for interest and other expenses related to tax-exempt income. The CIT(A) directed the AO to recompute the disallowance based on the Tribunal's earlier order and the Bombay High Court's decision in M/s Godrej Boyce Manufacturing Co. Ltd. The Tribunal upheld CIT(A)'s decision, emphasizing the need to consider net interest expenditure and specific purpose borrowings. It directed the AO to follow the Tribunal's directions for recomputation and upheld disallowance under Rule 8D(iii) at 0.5% of the average value of investments.

3. Disallowance of depreciation on Wind Turbine Generator:

The AO disallowed depreciation claimed on power evacuation infrastructure and transmission lines, treating them separately from the windmill. The CIT(A) allowed the depreciation, considering them integral to the windmill. The Tribunal upheld this, referencing decisions from other Tribunal benches, noting that the infrastructure and transmission lines are part and parcel of the windmill, thus eligible for higher depreciation rates.

4. Charging of interest under Section 234B of the Income Tax Act, 1961:

The issue of charging interest under Section 234B was raised by the assessee in the Cross Objections. The Tribunal noted this issue as consequential and dismissed it.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's Cross Objections for statistical purposes, ensuring detailed adherence to legal precedents and specific provisions under the Income Tax Act. The judgment emphasized the importance of following established ratios and correctly applying statutory provisions.