2016 (11) TMI 1669 - AT - Income Tax

Nature of expenditure - expenditure towards construction of compound wall, store room, underground sewage, design charges and temporary repairs to the building - revenue or capital expenditure - AO treated the expenditure as capital in nature and allowed depreciation at the rate of 10% - HELD THAT - Admittedly, the assessee incurred expenditure for construction of compound wall, watch tower, godown, underground drainage, etc. This Tribunal is of the considered opinion that the assessee has constructed compound wall, sewage drain, godown, etc. for permanent use in the business. It cannot be said that the infrastructures created by the assessee are for temporary use of the assessee. Therefore, the Assessing Officer has rightly treated the expenditure as capital in nature and allowed depreciation at the rate of 10%. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Disallowance u/s 14A r.w.r. 8D - Whether there was no direct expenditure under first limb of Rule 8D(2)? - Referring to limb (ii) of Rule 8D(2), the Assessing Officer found that under Rule 8D(2), disallowance was made - HELD THAT - For the purpose of limb (ii), the Assessing Officer has to compute the disallowance by following the method prescribed under Rule 8D(2)(ii). Similarly, for the purpose of limb (iii), the Assessing Officer has to take 0.5% of the average of value of investment which resulted in income which would not form part of total income. Therefore, for the purpose of limb (iii) alone, the disallowance cannot be extended beyond the income which does not form part of total income. Rule 8D(2) provides disallowance of average of all the three limbs therein. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Summary

Issues:
1. Disallowance of expenditure for assessment year 2009-10.
2. Disallowance under Section 14A of the Income-tax Act for assessment year 2012-13.

Analysis:

*Issue 1: Disallowance of expenditure for assessment year 2009-10*

The primary contention in this appeal was the disallowance of expenditure amounting to ?76,02,493 incurred by the assessee for the construction of various structures. The representative for the assessee argued that the expenditure should be treated as revenue expenditure since it was temporary in nature. However, the Departmental Representative contended that the structures were permanent and intended for long-term use. The Tribunal observed that the infrastructures constructed by the assessee, including compound wall, sewage drain, and godown, were meant for permanent use in the business. Consequently, the Tribunal upheld the Assessing Officer's decision to treat the expenditure as capital in nature and allow depreciation at 10%.

*Issue 2: Disallowance under Section 14A of the Income-tax Act for assessment year 2012-13*

In the appeal for the assessment year 2012-13, the main issue revolved around the disallowance made by the Assessing Officer under Section 14A of the Income-tax Act read with Rule 8D. The assessee's representative argued that the disallowance made by the Assessing Officer exceeded the income earned by the assessee and was therefore unjustified. The Assessing Officer had applied Rule 8D(2) to compute the disallowance, considering both the second and third limbs. The Tribunal noted that the disallowance under the third limb of Rule 8D(2) could not surpass the income not forming part of the total income. As Rule 8D(2) mandates the disallowance of the average of all three limbs, the Tribunal upheld the Assessing Officer's decision in this regard.

In conclusion, both appeals of the assessee were dismissed by the Tribunal, affirming the decisions of the lower authorities in both cases.