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2018 (6) TMI 1608 - AT - Income TaxAddition u/s 14A - investment out of interest free fund - HELD THAT - CIT(A) directed the AO to modify the disallowance required to be made u/s. 14A because she found that out of the total investment of ₹ 19,49,122/- a sum of ₹ 4,48,622/- was made out of interest free fund. This amount cannot be considered for making the disallowance thus, CIT(A) has restricted the disallowance required to be made on an investment of ₹ 15,00,500/. The assessee has not challenged this finding of the CIT(A) and after going through the CIT(A) s order, we do not find any error in the order of the CIT(A) in A.Y. 2010-11 which is confirmed. Similar finding has been recorded in A.Y. 2011-12 and therefore, the ground of appeal raised by the revenue in A.Y. 2011-12 is also rejected. Deduction u/s 80IA - dispute between the assessee and AO is that AO has notionally brought forward business losses and depreciation of earlier years and notionally set off against the income of the windmill - HELD THAT - As relying on VELAYUDHASWAMY SPINNING MILLS P. LTD. SUDAN SPINNING MILLS (P.) LTD. MOHAN BREWERIES 2010 (3) TMI 860 - MADRAS HIGH COURT it indicated that depreciation already claimed by the assessee and set off against the regular source of income cannot be notionally brought forward and set off against the income of windmill for the current year after selection of initial year for claiming deduction u/s. 80IA(iv). The assessee has been given choice of 10 consecutive years out of 15 years for claiming deduction u/s.80IA(iv). Once assessee has selected initial year then unabsorbed depreciation and losses of that year and subsequent years could be carried forward for set off against the income of those years before computing the deduction admissible u/s.80IA(iv). In the present cases, AO has brought forward the depreciation of A.Y. 2007-08, 2008-09 etc, which has already been set off against the regular income. He brought forward such depreciation on notional basis, which is contrary to the proposition laid down by the Hon ble Madras High Court. FAA has rightly appreciated the controversy and rightly granted the deduction to the assessee. We do not find any error in the order of the CIT(A) hence, this ground of appeal is rejected in both the years.
Issues Involved:
1. Deletion of disallowance under Section 14A of the Income Tax Act. 2. Deletion of addition related to deduction under Section 80IA(4)(iv) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Deletion of Disallowance under Section 14A of the Income Tax Act: The revenue contended that the learned Commissioner of Income-tax (Appeals) [CIT(A)] erred in deleting the disallowance of ?89,206/- and ?80,578/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act for the Assessment Years (AY) 2010-11 and 2011-12 respectively. The AO had disallowed these amounts using Rule 8D, arguing that the assessee had shown tax-free dividend income and made investments capable of generating exempt income. The CIT(A) found that out of the total investment of ?19,49,122/-, a sum of ?4,48,622/- was made out of interest-free funds, and thus, this amount could not be considered for disallowance. The CIT(A) accordingly restricted the disallowance to the investment of ?15,00,500/-. The Tribunal upheld the CIT(A)'s finding, noting that the assessee did not challenge this decision and found no error in the CIT(A)'s order for both AY 2010-11 and 2011-12. The CIT(A) referenced multiple judicial decisions, including the Hon'ble Delhi Special Bench in the case of Cheminvest Ltd. and the Hon'ble Kerala High Court in the case of Smt. Leena Ramchandran, which supported the view that disallowance under Section 14A is applicable even if no exempt income is earned during the relevant year. The Tribunal confirmed the CIT(A)'s approach and dismissed the revenue's appeal on this ground. 2. Deletion of Addition Related to Deduction under Section 80IA(4)(iv) of the Income Tax Act:The revenue also contended that the CIT(A) erred in deleting the addition of ?43,58,443/- and ?37,05,554/- for AY 2010-11 and 2011-12 respectively, related to the deduction claimed under Section 80IA(4)(iv). The assessee had installed a windmill and started generating power from AY 2007-08 but did not claim the deduction initially due to losses from heavy depreciation. In AY 2010-11, the assessee claimed the deduction, but the AO notionally brought forward business losses and depreciation from earlier years to set off against the current year's income. The CIT(A) pointed out that the actual claim was ?41,97,875/- and not ?43,58,443/- as disallowed by the AO, which included a deduction under Section 80G. The CIT(A) upheld the assessee's claim, stating that as per Section 80IA(5), if depreciation and business losses have already been set off against other income before the selection of the initial year for claiming the deduction, such unabsorbed depreciation should not be brought forward notionally. The Tribunal referenced the Hon'ble Madras High Court's decision in the case of Velayudhaswamy Spinning Mills, which held that losses and depreciation of years prior to the initial assessment year, already set off against other income, cannot be notionally brought forward. The Tribunal agreed with the CIT(A) that the AO's approach was contrary to this legal precedent and confirmed the CIT(A)'s order, dismissing the revenue's appeal on this ground as well. Conclusion:The appeals of the revenue were dismissed, with the Tribunal confirming the CIT(A)'s orders for both AY 2010-11 and 2011-12. The key findings were that disallowance under Section 14A should be restricted to the interest-bearing funds used for investments capable of generating exempt income, and that unabsorbed depreciation already set off against other income should not be notionally brought forward for the purpose of calculating deductions under Section 80IA(4)(iv). Order pronounced in the Court on 6th June 2018 at Ahmedabad.
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