2018 (2) TMI 1905 - AT - Income Tax

Disallowance of depreciation on R D equipments - @ 10% OR 25% - HELD THAT - Assessee has been fair enough to admit that this disallowance of depreciation has resulted into income of the assessee s unit which otherwise is exempt u/s 80IC of the Act. Hence the above disallowance of depreciation is tax neutral to the assessee. In view of the above without going into merits of the case this ground is dismissed being tax neutral and rendered academic in nature. Deduction u/s 80IC - @ 30% OR 100% on account of substantial expansion undertaken in earlier years - HELD THAT - A perusal of the order of the Assessing officer reveals that the Assessing officer has not disputed that the assessee unit has carried out substantial expansion as provided under clause (b) of sub section (2) read with clause (ix) of sub section (7) of section 80IC of the Act. Almost similar view has also been taken by the Hon ble Himachal Pradesh High Court in the case of M/s Stovekraft India 2017 (12) TMI 69 - HIMACHAL PRADESH HIGH COURT - The impugned order of the Ld. CIT(A) on this issue is set aside and the AO is directed to grant to the assessees deduction at the rate of hundred percent of its eligible profits as per the ruling of the jurisdictional High Court in this regard in the case of M/s Stovekraft India vs. Commissioner of Income Tax (supra). In view of the above ground No.2 of the appeals is allowed. Disallowance of interest income and other income out of deduction claimed u/s 80IC - HELD THAT - Assessee could not demonstrate with convincing evidence on the file as to how the interest income on the FDRs and the other income relates to manufacturing activity of the assessee. In view of this we do not find any infirmity in the order of the lower authorities in not allowing deduction u/s 80IC on the interest income and other income. This issue is decided against the assessee.

Summary

Issues:
1. Disallowance of depreciation on R&D equipments
2. Allowance of deduction u/s 80IC of Income Tax Act
3. Disallowance of deduction on interest income and other income

Analysis:

Issue 1: Disallowance of Depreciation on R&D Equipments
The appellant contested the disallowance of depreciation on R&D equipment at 10% instead of the claimed 25%. The appellant acknowledged that this disallowance had no tax impact due to being exempt under section 80IC of the Income Tax Act. Consequently, the claim was considered "tax neutral" and dismissed as academic, resulting in no further discussion on the merits of the case.

Issue 2: Allowance of Deduction u/s 80IC of Income Tax Act
The primary contention revolved around the CIT(A) disallowing the claim of deduction at 100% under section 80IC of the Income Tax Act, citing substantial expansion of the unit. The appellant relied on a decision by the Himachal Pradesh High Court, which favored the assessee's entitlement to the deduction. The Tribunal concurred with this view, emphasizing that the Assessing Officer had not contested the substantial expansion carried out by the assessee. The Tribunal, therefore, set aside the CIT(A)'s order and directed the AO to grant the deduction at a rate of 100% based on the High Court's ruling.

Issue 3: Disallowance of Deduction on Interest Income and Other Income
The appellant challenged the disallowance of deduction on interest income and other income under section 80IC. However, the appellant failed to provide substantial evidence linking the interest income and other income to the manufacturing activity of the assessee. Consequently, the Tribunal upheld the lower authorities' decision to disallow the deduction on interest income and other income, ruling against the appellant on this issue.

In conclusion, the appeal was partially allowed, with the Tribunal dismissing the disallowance of depreciation as "tax neutral," granting the deduction at 100% under section 80IC based on the High Court's decision, and upholding the disallowance of deduction on interest income and other income due to lack of evidence linking them to manufacturing activities.