2014 (11) TMI 1204 - AT - Income Tax

Addition u/s.14A r.w. Rule 8D - HELD THAT - Since there is a categorical finding by the AO that the assessee company has used funds from the cash credit account for investment in shares, the dividend of which has been shown as exempt, therefore, we find no infirmity in the order of the CIT(A) upholding the action of the AO in disallowing interest u/s.14A r.w. Rule 8D. Accordingly, this ground by the assessee is dismissed. Disallowance of Cost of Diesel Generator Set - HELD THAT - We find force in the submission of the assessee that the cost of duration of the procurement and commissioning of a new generator set which is about 10 months would have affected the production schedule of the assessee company. The submission of the assessee before the lower authorities that both the companies are managed by separate Board of Directors has not been disputed. Since undisputedly both the companies which are listed public companies and are falling in the 30% tax bracket, therefore, the apprehension that such transfer was to reduce the tax liability is also not correct. Further, the AO has also not ascertained the market value of a 10 to 15 years old generator set of similar capacity purchased by the assessee from Kirloskar Oil Engines Ltd. CIT(A) was not justified in upholding the action of the AO in invoking Explanation 3 to section 43(1). We accordingly set-aside the order of the CIT(A) on this issue and direct the AO to allow the depreciation as claimed by the assessee. Disallowance of commission paid to Non-Executive Director - as per DR since the assessee has not substantiated with evidence the services rendered by the non-executive directors, therefore, the CIT(A) was not justified in deleting the addition - HELD THAT - The audited accounts of the assessee company show the meetings attended by the non-executive directors in the Board meeting as well as meetings of the Audit committee. Further, similar payments made in the past have not been disallowed. The payment of commission has also been approved by the Board of Directors and within the permissible limit of the Companies Act. No infirmity in the order of the Ld.CIT(A) deleting the disallowance being commission paid to non-executive directors. Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed. Set off unabsorbed depreciation pertaining to A.Y. 1999-2000 against the income of the current year - HELD THAT - As decided in GENERAL MOTORS INDIA PVT. LTD VERSUS DEPUTY COMMISSIONER OF INCOME-TAX 2012 (8) TMI 714 - GUJARAT HIGH COURT there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 upto the A.Y.2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. - Decided against revenue

Issues Involved:
1. Disallowance of Cash Credit Interest
2. Disallowance of Cost of Diesel Generator Set
3. Allowability of Commission Paid to Non-Executive Directors
4. Set-off of Unabsorbed Depreciation Relating to AY 1997-98 to 1999-00

Issue-wise Detailed Analysis:

1. Disallowance of Cash Credit Interest:
The assessee contested the disallowance of Rs. 11,173/- under Section 14A read with Rule 8D, arguing that investments in mutual funds were made from surplus funds, not borrowed funds. The Assessing Officer (AO) noted that the cash credit account was used for purchasing shares, whose dividend income was claimed as exempt. The CIT(A) upheld the AO's decision, and the tribunal found no infirmity in this disallowance, dismissing the assessee's appeal on this ground.

2. Disallowance of Cost of Diesel Generator Set:
The assessee purchased a second-hand Diesel Generator Set from a group company, Kirloskar Oil Engines Ltd. (KOEL), for Rs. 5,27,95,285/-, while its written down value (WDV) was Rs. 4,05,14,509/-. The AO applied Explanation 3 to Section 43(1), substituting the purchase cost with the WDV, disallowing depreciation of Rs. 18,42,116/-. The CIT(A) upheld this, citing lack of transparency and absence of independent valuation. The tribunal, however, found that both companies were in the same tax bracket, and the purchase was at arm's length, primarily due to operational needs and cost constraints. The tribunal set aside the CIT(A)'s order and directed the AO to allow the claimed depreciation.

3. Allowability of Commission Paid to Non-Executive Directors:
The AO disallowed Rs. 22 lakhs paid as commission to non-executive directors, questioning the lack of evidence for services rendered. The CIT(A) allowed the claim, noting compliance with Section 309 of the Companies Act and past consistency in similar payments. The tribunal upheld the CIT(A)'s decision, acknowledging the mandatory role of non-executive directors in listed companies and their involvement in various committees, thus justifying the commission payment.

4. Set-off of Unabsorbed Depreciation Relating to AY 1997-98 to 1999-00:
The AO disallowed the set-off of unabsorbed depreciation of Rs. 10,42,25,278/- from AY 1999-2000, relying on the Special Bench decision in Times Guarantee Ltd., which restricted carry-forward to eight years. The CIT(A) allowed the set-off, referencing the Gujarat High Court's decision in General Motors India Pvt. Ltd., which overruled the Special Bench's decision. The tribunal upheld the CIT(A)'s decision, confirming the applicability of the amended Section 32(2) post-Finance Act 2001, allowing indefinite carry-forward of unabsorbed depreciation.

Conclusion:
The tribunal dismissed the assessee's appeal on the disallowance of cash credit interest but allowed the appeal on the cost of the Diesel Generator Set. It upheld the CIT(A)'s decisions on the commission paid to non-executive directors and the set-off of unabsorbed depreciation, dismissing the revenue's appeal on these grounds. The overall result was a partial allowance of the assessee's appeal and dismissal of the revenue's appeal.

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