2018 (4) TMI 17 - AT - Income Tax

Addition u/s 14A - Held that - The dominant purpose for which the investment in shares is made by an assessee is not relevant in determining the allowability of that expenditure and section 14A of the Act has to be interpreted particularly, the word in relation to the income that does not form part of the total income. If the expenditure is incurred in making investment which yield exempt income, that much of expenditure which is attributable to that income is to be disallowed and cannot be treated as business expenditure. If no expenditure is incurred in relation to exempted income, no disallowance can be made under section 14A of the IT Act. It was further observed that only that expenditure which has been incurred in relation to non-taxable income has to be disallowed. If an expenditure incurred has no principal connection with the exempted income, then such an expenditure would clearly be treated as not in relation to the income which does not form part of the total income , and such expenditure would be allowed as business expenditure. In the present case, direct expenditure has been incurred on the investment made in sister concern. Such expenditure has to be disallowed. Hence we do not find any infirmity in the order of the CIT(A) and confirm the same. In the present case, direct expenditure has been incurred on the investment made in sister concern. Such expenditure has to be disallowed. Hence we do not find any infirmity in the order of the CIT(A) and confirm the same. - Decided against revenue

Summary

Issues Involved:
1. Depreciation on vehicles used for business.
2. Disallowance under Section 14A of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Depreciation on Vehicles Used for Business:
The first issue concerns the rate of depreciation on vehicles used by the appellant in their business. The appellant claimed a higher depreciation rate of 30% for vehicles used in their business of running on hire, but the Assessing Officer (AO) restricted it to 15%. The CIT(A) upheld the AO's decision, stating that running vehicles on hire was an integral part of the appellant's hotel business, and thus, a higher depreciation rate was not applicable. The appellant argued that the jurisdictional High Court's decision in CIT vs. Dr. KR Jayachandran (212 ITR 637) supported their claim for higher depreciation, even if running vehicles on hire was incidental to their main business. The Tribunal, however, referred to its earlier decision in The Baliapatam Tile Works Limited vs. DCIT, which held that higher depreciation is only applicable if the vehicles are used in a separate business of running them on hire. The Tribunal concluded that since the appellant's primary business was hoteliering and not running vehicles on hire, the higher depreciation rate was not applicable, and thus, dismissed this ground.

2. Disallowance under Section 14A of the Income Tax Act:
The second issue pertains to the disallowance made under Section 14A of the Income Tax Act, read with Rule 8D, concerning investments made by the appellant in the shares of Harmonia Ayurveda Health Gardens Pvt. Ltd. The appellant argued that the investments were not made to earn exempt income but to gain synergy by having hotel properties in various tourist locations. The AO disallowed ?37,44,015/- under Section 14A, stating that expenses related to investments yielding exempt income should be reduced from total expenditure. The CIT(A) upheld this disallowance, relying on the Bombay High Court's decision in Godrej & Boyce Mfg Co. Ltd v. CIT and a CBDT circular. The appellant contended that no exempt income was earned from these investments during the year and cited various judicial precedents supporting their claim that no disallowance should be made in the absence of exempt income. However, the Tribunal, referencing the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, held that expenditure incurred in relation to investments yielding exempt income must be disallowed, regardless of the dominant purpose of the investment. Since direct expenditure was incurred on the investment, the Tribunal found no infirmity in the CIT(A)'s order and upheld the disallowance.

Conclusion:
The Tribunal dismissed the appeal, upholding the lower authorities' decisions on both issues. The appellant's claim for a higher depreciation rate on vehicles used in their business was denied, and the disallowance under Section 14A was confirmed, as the direct expenditure on investments in exempt income-yielding assets was deemed disallowable.