2018 (5) TMI 752 - AT - Income Tax

Income from house property - proportionate disallowance of depreciation of building consisting of existing structure which was let-out - Held that - We could not correlate the identification of property let out with identification of property called by the assessee as an existing structure out of which this area of 701 square meter was claimed to be carved out and let-out. These are findings of fact which require proper co-relation and merely filing of documents are not sufficient. Thus, we are principally in agreement with the assessee s proposition that the depreciation in proportion of let out constructed area to the total constructed area of the building called as an existing building is to be disallowed but we are remitting the matter back to the file of the AO for limited purposes of verification and correlation by identification of the property consisting of an area of 701 Sq mtrs of area being let-out by the assessee with the land identification of the building and total constructed area of the said building. This ground is allowed for statistical purposes Disallowance u/s 14A - suo moto disallowance by assessee - Held that - Referring to Article 265 of the Constitution of India which clearly mandate that the taxes are not to be imposed save by authority of law and no taxes shall be levied or collected except by authority of law. Thus keeping in view mandate of article 265 of the Constitution of India read with factual matrix of the case and the case laws as discussed by us in our conclusions, we hold that disallowance u/s. 14A in the instant case before us cannot exceed a sum of ₹ 2,800/- and hence we restrict disallowance u/s. 14A to ₹ 2,800/- not withstanding that the assessee voluntarily suo-motu disallowed a sum of ₹ 3,94,886/- u/s 14A r.w.r. 8D in its return of income filed with the Revenue. We allow additional ground of appeal raised by the assessee. The assessee succeeds in this additional ground.

Summary

Issues Involved:
1. Depreciation disallowance of ?17,76,230/-
2. Disallowance under Section 14A of ?48,492/-

Issue-wise Detailed Analysis:

1. Depreciation Disallowance of ?17,76,230/-:

The assessee, engaged in manufacturing auto ancillary parts, claimed depreciation on a property let out to an associated company. The AO disallowed the depreciation claim of ?17,76,230/- on the grounds that the property was generating rental income, which was taxed under "Income from House Property." The assessee argued that only a part of the existing building (701 Sq. Mtrs out of 2528.05 Sq. Mtrs) was let out and claimed that only 27.455% of the depreciation should be disallowed. The CIT(A) upheld the AO's disallowance, stating that the assessee did not provide sufficient evidence to support the claim.

Upon appeal, the tribunal noted that the assessee had filed relevant documents, including a leave and license agreement and building plans, albeit as additional evidence before the CIT(A). The CIT(A) did not call for a remand report on these additional documents, violating Rule 46A of the Income Tax Rules, 1962. The tribunal agreed with the assessee's proposition that only the proportionate depreciation corresponding to the let-out area should be disallowed. However, due to the lack of proper correlation and identification of the property, the matter was remitted back to the AO for verification and correlation of the let-out area with the existing building.

2. Disallowance under Section 14A of ?48,492/-:

The assessee received a dividend income of ?2,800/-, claimed as exempt under Section 10(34). The AO, applying Rule 8D of the Income Tax Rules, 1962, disallowed ?4,43,378/- under Section 14A, which included an additional disallowance of ?48,492/-. The assessee argued that no expenditure was incurred in earning the exempt income and that the disallowance under Section 14A should not exceed the exempt income. The CIT(A) upheld the AO's disallowance.

On appeal, the tribunal admitted the additional ground that disallowance under Section 14A cannot exceed the exempt income, citing several judicial precedents. The tribunal observed that the assessee's own funds exceeded the investments, invoking the presumption that investments were made from interest-free funds. The tribunal referred to the decisions of the Hon’ble Bombay High Court in HDFC Bank Ltd. and Reliance Utilities and Power Ltd., which support this presumption. Consequently, the tribunal restricted the disallowance under Section 14A to ?2,800/-, aligning with the exempt income, and allowed the additional ground raised by the assessee.

Conclusion:

The tribunal allowed the appeal partly, remitting the issue of depreciation disallowance back to the AO for verification and restricting the disallowance under Section 14A to ?2,800/-. The order was pronounced in the open court on 09.05.2018.