2016 (11) TMI 357 - AT - Income Tax

Depreciation claim - capital expenditure being technical fee and other expenses, incurred towards setting up of the Hotel project - Held that - Tribunal decided this issue in A.Ys. 2007-08 in favour of the assessee and held that assessee was entitled to capitalise the amount and claim depreciation thereon. But for the purpose of verification of facts, this issue was sent back to the file of the AO with the direction to verify the amount of expenditure and allowing depreciation accordingly. Thus, this year also we send this issue back to the file of the AO with direction to follow the order of the Tribunal for the A.Ys 2007-08 & 2008- 09 and accordingly allow depreciation after verification of requisite facts. With these directions, this issue is sent back to the file of the AO and may be treated as allowed, for statistical purposes. Disallowance u/s 14A - Held that - Invocation of section 14A is not automatic. The AO is bound to record his satisfaction before proceeding to make disallowance u/s 14A for more than the voluntary disallowance made by the assessee. The AO in the case before us failed to record any reasoning whatsoever or satisfaction and thus he did not assume jurisdiction to make disallowance u/s 14A read with rule 8D(2) (iii) as per law. Thus the disallowance deleted - Decided in favour of assessee Addition of notional interest on the loan given by the assessee to its wholly owned subsidiary - Held that - Assessee never recorded the impugned amount in its books of account shows that none of the parties considered the amount of interest for the year under consideration as expenses / income. The assessee company took a decision for not booking the interest income in view of the facts and circumstances of the case as have been discussed in detail in above part of our order. Thus, in the given facts of this case, the impugned amount of interest was merely a hypothetical income, therefore it cannot be considered as income as per principles of real income theory . The AO has wrongly added it as part of income on notional basis and the same is directed to be deleted. This ground is allowed.

Summary

Issues Involved:
1. Depreciation claim on capital expenditure.
2. Disallowance of other expenses under Section 14A.
3. Addition of unaccrued interest on loan to subsidiary.

Issue-wise Detailed Analysis:

1. Depreciation Claim on Capital Expenditure:
The assessee challenged the CIT(A)'s decision to uphold the AO's disallowance of a ?16,49,070 depreciation claim related to capital expenditure for setting up a hotel project. The Tribunal noted that similar issues had been resolved in favor of the assessee in previous years (A.Ys 2007-08 and 2008-09). The Tribunal had allowed the capitalization of expenses and the subsequent claim for depreciation, provided the expenses were verified and crystallized during the relevant year. The Tribunal directed the AO to follow the earlier orders, verify the expenses, and allow the depreciation claim accordingly.

2. Disallowance of Other Expenses under Section 14A:
The assessee contested the disallowance of administrative expenses under Section 14A, calculated at 0.50% of average investments as per Rule 8D(2)(iii). The assessee argued that the investments in mutual funds required minimal administrative involvement and had voluntarily disallowed ?50,000. The Tribunal observed that the AO did not record any reasons or satisfaction for disallowing more than the voluntary amount. Citing the Delhi High Court's judgment in CIT vs I.P. Support Services India Pvt Ltd, the Tribunal emphasized that Section 14A's invocation is not automatic and requires the AO to record dissatisfaction with the assessee's claim. Since the AO failed to do so, the Tribunal deleted the disallowance, allowing the ground in favor of the assessee.

3. Addition of Unaccrued Interest on Loan to Subsidiary:
The assessee disputed the addition of ?53,43,800 as notional interest on a loan given to its wholly-owned subsidiary, which was later converted into equity. The assessee argued that the subsidiary incurred significant losses, making the interest non-recoverable, and thus did not book any interest income. The AO added the notional interest, assuming it accrued over time. The Tribunal noted that the subsidiary did not provide for interest in its accounts and was financially incapable of paying it. Citing the "real income theory" and various judicial precedents, including CIT vs Neon Solutions Pvt Ltd and CIT vs Excel Industries Ltd, the Tribunal held that income tax cannot be levied on hypothetical income. The Tribunal concluded that the notional interest was not real income and directed its deletion, allowing the ground in favor of the assessee.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the AO to verify and allow the depreciation claim, deleting the disallowance under Section 14A, and removing the addition of notional interest.