2017 (10) TMI 1380 - HC - Income Tax

Claim of depreciation on public roads - as per department that the National Highway is not road in that view of the matter the same will not be governed by the Schedule of Appendix-I and they will not be entitled for the expenses under the capital account - Held that - While considering the matter we have to go by the common parlance of road where public at large has an access. The assessee was granted license for construction against which he has right to use and collect license fee to use of the land. In that view of the matter he has right to restrict the people without non payment of toll tax. If we look at the definition which is given under the Income Tax Act even a development made while occupying the premises and development of a road was the main agreement MOU referred by us.In view of written submissions submitted by Mr. Ranka it is not only road they have to construct toll booth and provide facilities for the staff for the purpose of their accommodation. In that view of the matter the Supreme Court judgment which is sought to be relied upon by the department in Challapalli Sugars Ltd. V. CIT 1974 (10) TMI 3 - SUPREME COURT will not apply and the tribunal has rightly interpreted the change in law and more particularly under the law which has been inducted after year 1983. Thus on the first issue we are in complete agreement with the view taken by the tribunal in allowing the claim of depreciation on public roads treating the same as building. - Decided against revenue Claim of depreciation on EDP Equipments - @ 60% OR @ 15% - treated as physical structures OR computers - Held that - The contention which has been raised that equipment which are attached with the power equipment are not entitled under item no.5 of Schedule-I in view of the fact that note 7 will not cover complete equipment which are attached with the system but in our considered opinion the optical fibers which are used exclusively for the computer configuration and it is mandatory for the operation. It is part of computer system. In that view of the matter the view taken by the tribunal is just and proper.- Decided against revenue Disallowance under 43B(f) - Held that - We find that the Hon ble Calcutta High Court has struck down section 43B(f) being arbitrary unconscionable and de hors the Apex Court decision in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT . This judgment was duly brought into the notice of the ld. CIT(A). CIT(A) without taking note of the ratio laid down by the Hon ble Calcutta High Court proceeded to sustain the finding of the AO. CIT(A) has recorded the fact that the AO has disallowed the claim as per provisions of section 43B(f) of the Act and it has been struck down by the Hon ble Calcutta High Court. In our considered view the ld. CIT(A) was not justified and acted this issue is set aside. The AO is directed to delete the disallowance in the light of judgment of Hon ble Calcutta High Court rendered in the case of Exide Industries Ltd. & Others vs. Union of India & Others 2007 (6) TMI 175 - CALCUTTA HIGH COURT . - Decided against revenue Disallowance under section 14A - Held that - In the absence of any material or basis to hold that the interest expenditure directly or indirectly was attributable for earning the dividend income. The AO ought not to have invoked the provisions of section 14A for making the disallowance. - Decided against revenue

Summary

Issues Involved:
1. Depreciation on public roads.
2. Depreciation on EDP (Electronic Data Processing) equipment.
3. Disallowance under Section 43B(f) for provision of leave encashment.
4. Disallowance under Section 14A read with Rule 8D.
5. Capitalizing pre-incorporation expenditure.
6. Capitalizing expenditure on tree cutting and debris removal.
7. Deletion of penalty under Section 271(1)(c).

Detailed Analysis:

1. Depreciation on Public Roads:
The primary issue was whether the Tribunal was justified in allowing depreciation on public roads by treating them as buildings. The court referred to the National Highway Act and various sections of the Income Tax Act, including Section 32 and its explanation. The Tribunal's interpretation was upheld, recognizing that roads, bridges, and culverts fall within the meaning of 'building' for depreciation purposes. The court agreed with the Tribunal, citing the legislative intent and broader definitions provided in the Income Tax Rules.

2. Depreciation on EDP Equipment:
The Tribunal allowed depreciation at 60% on EDP equipment, treating them as computer equipment, contrary to the department's stance of allowing only 15%. The court reviewed the nature of the equipment and their integration into the computer system, concluding that the Tribunal's decision was correct. The equipment's role in toll collection and traffic management was crucial, justifying the higher depreciation rate.

3. Disallowance under Section 43B(f) for Provision of Leave Encashment:
The Tribunal struck down the disallowance under Section 43B(f), relying on the Calcutta High Court's judgment in Exide Industries Ltd. The court agreed, stating that the provision for leave encashment should not be disallowed as it was arbitrary and unconscionable, aligning with the Supreme Court's decision in Bharat Earth Movers.

4. Disallowance under Section 14A read with Rule 8D:
The Tribunal deleted the disallowance of Rs. 1,45,25,700 under Section 14A, noting the absence of a direct nexus between borrowed funds and investments in mutual funds. The court upheld this decision, emphasizing that the Assessing Officer had not established any material connection and that the assessee had sufficient interest-free funds for the investments.

5. Capitalizing Pre-Incorporation Expenditure:
The Tribunal allowed the capitalization of pre-incorporation expenses, including bid success fees and reimbursement of expenses incurred by Novapan Industries Ltd. and GVK Capital and Finance Ltd. The court agreed, noting that these expenses were integral to the business's establishment and were incurred as part of the total capital outlay of the project.

6. Capitalizing Expenditure on Tree Cutting and Debris Removal:
The Tribunal found that the expenditure on tree cutting and debris removal was part of the project's capital cost. The court supported this view, rejecting the Assessing Officer's ad hoc disallowance and emphasizing the necessity and justification of these expenses for the project's execution.

7. Deletion of Penalty under Section 271(1)(c):
The Tribunal deleted the penalty imposed under Section 271(1)(c) for furnishing inaccurate particulars of income. The court upheld this decision, noting that the issues leading to the penalty had been resolved in favor of the assessee, thereby invalidating the basis for the penalty.

Conclusion:
The court dismissed all departmental appeals, affirming the Tribunal's decisions on all issues. The judgments emphasized the broader interpretation of tax laws, the necessity of substantiating claims with evidence, and the importance of aligning with legislative intent and judicial precedents.