2016 (10) TMI 1323 - AT - Income Tax

Disallowance of the provision for Leave Encashment - HELD THAT - We find that the Hon ble Calcutta High Court in the case of Exide Industries Ltd. Others vs. Union of India Others 2007 (6) TMI 175 - 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). However the ld. 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. The ld. 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 beyond his jurisdiction. Therefore the order of ld. CIT(A) on this issue is set aside. The AO is directed to delete the disallowance - Assessee s Ground no. 1 and 1.1 are allowed. Disallowance invoking the provisions of section 14A r.w.r. 8D - HELD THAT - AO has made disallowance by invoking the provisions of Rule 8D of the IT Rules 1962 towards interest. There is no dispute with regard to the provisions. If the assessee uses its own non-interest bearing funds in that event it would not be open to the AO to make disallowance in respect of the interest by invoking the provisions of rule 8D of the Income Tax Rules. The ld. Counsel for the assessee has made reliance on the judgment of the Hon ble Bombay High Court rendered in the case of CIT vs. K. Raheja Corporation P. Ltd. 2011 (8) TMI 148 - BOMBAY HIGH COURT wherein 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 decision of the Income Tax Appellate Tribunal in deleting the disallowance of interest under section 14A cannot be faulted. In the present case both the authorities below have proceeded merely on the basis of presumption which is not supported by any material. Computation of book profit under section 115JB in respect of the amount of disallowance made under section 14A - HELD THAT - We have already allowed ground no. 2 of the assessee s appeal by directing the AO to delete the disallowance made under section 14A. Accordingly the AO is directed to re-compute the book profit in view of our decision in ground no. 2. This ground of the assessee is allowed for statistical purposes. Deduction u/s 80IB on the Miscellaneous Income - HELD THAT - As per section 80IB the deduction is available in respect of the profits and gains derived from any business referred to in sub-section 3 to 11 11(A) and 11(B) of section 80IB of the Act. The assessee is required to demonstrate that the amount represents the profit derived from the eligible business. In the present case the amount represents unclaimed security deposit written back in the book. In our considered view the security deposit although might have received in the normal business transaction however the writing off the same cannot be the profit derived from the eligible business. Therefore we do not see any merit in the ground of the assessee and the same is hereby dismissed. Interest income earned from regular business activities of the assessee company - Business income or Income from Other sources - Disallowing deduction u/s 80IB - contention of the assessee is that the assessee has no other alternative but to deposit the amount in the form of FDRs as per the terms of agreement and the earning out of this fund deposited in the fixed deposits under the term of contract which was lying idle at some point of time would certainly be the income derived from the eligible business - HELD THAT - We find some merit in the contention of the ld. Counsel for the assessee but the fact whether there was such term of contract forcing the assessee to deposit the amount in the form of FDR requires to be verified at the end of the AO. Therefore we set aside the order of ld. CIT (A) on this issue and restore the issue to the file of the AO for decision afresh. This ground of the assessee s appeal is allowed for statistical purposes. Depreciation claimed on road/on road construction while treating it as a building in nature - HELD THAT - the issue is squarely covered in favour of the assessee by the decision of Coordinate Bench of the Tribunal in the assessee s own case in Revenue s appeal 2014 (9) TMI 163 - ITAT JAIPUR for the assessment year 2008-09. Therefore he prayed that ground no. 1 of the revenue s appeal be rejected. Deduction u/s 80IB on sale of scrap - HELD THAT - As scrap has been generated in the normal course of business of operation and maintenance of the toll highway and is a normal business transaction which in any case could not be held as non-business receipt. The scrap include the metal crash barriers pedestrian guard rails etc. which are fixed on the toll road and got damaged in the accidents taken place and being not remained for use as such become scrap. Had there been no business of operating and maintaining of the toll highway there would be no question of generation of any such scrap thus the income from sale of scrap is normal business income and therefore is eligible for deduction u/s 80IB - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of provision for leave encashment under Section 43B(f).
2. Disallowance under Section 14A related to interest expenses.
3. Computation of book profit under Section 115JB.
4. Deduction under Section 80IB on Miscellaneous Income.
5. Classification of interest income as Income from Other Sources versus Business Income.
6. Depreciation on road construction treated as building.
7. Depreciation rate on EDP equipment.
8. Deduction under Section 80IB on sale of scrap.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Leave Encashment under Section 43B(f):
The assessee contested the disallowance of Rs. 19,33,345/- for leave encashment provision, citing the Hon'ble Calcutta High Court's decision in Exide Industries Ltd. vs. UOI, which declared Section 43B(f) ultra vires. The Tribunal found that the CIT(A) erred in upholding the disallowance, as the Calcutta High Court's decision was binding. Consequently, the Tribunal directed the AO to delete the disallowance, allowing the assessee's appeal on this ground.

2. Disallowance under Section 14A Related to Interest Expenses:
The assessee challenged the disallowance of Rs. 1,45,25,700/- under Section 14A, arguing that investments were made from surplus funds, not borrowed funds. The Tribunal noted that the AO did not establish a nexus between borrowed funds and investments. Citing the Bombay High Court's decision in CIT vs. K. Raheja Corporation P. Ltd., the Tribunal held that disallowance under Section 14A was not justified in the absence of such a nexus. The Tribunal directed the AO to delete the disallowance, allowing this ground of the appeal.

3. Computation of Book Profit under Section 115JB:
Given the Tribunal's decision to delete the disallowance under Section 14A, the AO was directed to re-compute the book profit under Section 115JB accordingly. This ground was allowed for statistical purposes.

4. Deduction under Section 80IB on Miscellaneous Income:
The assessee's claim for deduction under Section 80IB on Miscellaneous Income of Rs. 1,40,300/- was rejected by the CIT(A) and upheld by the Tribunal. The Tribunal agreed that the unclaimed security deposit written back did not qualify as profit derived from eligible business activities. This ground of the appeal was dismissed.

5. Classification of Interest Income as Income from Other Sources versus Business Income:
The assessee argued that interest income of Rs. 2,40,27,526/- from fixed deposits should be classified as business income and eligible for deduction under Section 80IB. The Tribunal found merit in the assessee's contention but remanded the issue to the AO for verification of whether the deposits were made as per contractual terms. This ground was allowed for statistical purposes.

6. Depreciation on Road Construction Treated as Building:
The revenue's appeal against the deletion of disallowance of Rs. 29,71,10,536/- for depreciation on road construction was rejected. The Tribunal noted that the issue was previously decided in favor of the assessee by a Coordinate Bench, treating roads as eligible for depreciation. The revenue's ground was dismissed.

7. Depreciation Rate on EDP Equipment:
The revenue's appeal against allowing 60% depreciation on EDP equipment was also rejected. The Tribunal followed its earlier decision, affirming that the higher depreciation rate was applicable. This ground was dismissed.

8. Deduction under Section 80IB on Sale of Scrap:
The revenue's appeal against allowing deduction under Section 80IB on sale of scrap amounting to Rs. 7,66,589/- was dismissed. The Tribunal upheld the CIT(A)'s finding that the scrap was generated in the normal course of business, making it eligible for deduction. This ground was dismissed.

Conclusion:
The assessee's appeal was partly allowed, with significant relief granted on disallowances under Sections 43B(f) and 14A, and the issue of interest income remanded for further verification. The revenue's appeal was dismissed in its entirety, upholding the CIT(A)'s decisions on depreciation and deductions.