2018 (9) TMI 1314 - AT - Income Tax

Revision u/s 263 - erroneous claim of depreciation @ 30% instead of 15% - Held that - We find that the assessment order was completed u/s 143(3) of the Act and the AO had called for certain details in his questionnaire, but the details with regard to the issues pointed out by the Pr. CIT in his order u/s 263 were not called for and verified by the AO. Assessee, in fact, in reply to the notice u/s 143(3) rws 263 had admitted that it had made an erroneous claim of depreciation @ 30% instead of 15%. Thus, it is clear that on this issue itself, the AO has not made any verification. Similarly, with regard to other issues also we do not find any verification made by the AO. Although the ld. Counsel for the assessee filed additional grounds of appeal and also argued that revision cannot be done on the basis of audit objection, there is no material before us with regard to such audit objection on the basis of which revision has been made. Addition u/s 14A - Held that - We find that the issue raised in these grounds is covered in favour of the assessee by the decisions of the coordinate benches of this Tribunal and also by the decision of The Hon ble Delhi High Court in the case of Cheminvest Ltd., (2015 (9) TMI 238 - DELHI HIGH COURT) wherein it has been held that section 14A will not apply where no exempt income is received or receivable during the relevant assessment year. Therefore, subject to verification that the assessee has not earned any exempt income during the relevant P.Y., ground treated as allowed and other grounds are not adjudicated as it would only be an academic exercise. Capitalization of interest - Held that - Assessee submitted that interest expenditure debited to the P&L A/c is for the loan taken for specific purpose and not for the purpose for the capital work-in-progress, therefore, capitalization of interest is not called for. Assessee has filed financial statement and as seen from the schedule 20 thereof, assessee has paid interest on term loans and other interest of bank and finance charges. Assessee s contention that the interest paid is towards a particular loan, is not established. As assessee submitted that this issue may be remanded to the AO for verification. We remand this issue to the file of AO with a direction to verify assessee s contention that capital work-n-progress of ₹ 1,00,18,000/- was from out of the cash generated from operations/internal accruals and not from interest bearing funds. Ground as allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the order under Section 263 of the Income Tax Act.
2. Disallowance of depreciation claimed at 30% instead of 15%.
3. Disallowance under Section 14A related to investments.
4. Capitalization of interest on capital work-in-progress.

Issue-wise Detailed Analysis:

1. Validity of the Order under Section 263 of the Income Tax Act:
The assessee challenged the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263, arguing that the Pr. CIT did not follow the ratio laid down by the Supreme Court in the case of Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax. The assessee contended that the revision was based on audit objections and that the original assessment was completed after careful verification of all issues. The ITAT upheld the Pr. CIT's order, noting that the Assessing Officer (AO) did not verify the issues pointed out by the Pr. CIT during the original assessment. The ITAT referenced the Supreme Court's judgment in CIT vs. Amitabh Bachchan, emphasizing that the revision was justified as the AO failed to make necessary verifications.

2. Disallowance of Depreciation Claimed at 30% Instead of 15%:
The Pr. CIT observed that the assessee erroneously claimed depreciation on trucks used for business at 30% instead of the allowable 15%. The assessee admitted this error during the revision proceedings. The ITAT noted that the AO did not verify this issue during the original assessment, making the assessment order erroneous and prejudicial to the interests of revenue.

3. Disallowance under Section 14A Related to Investments:
The Pr. CIT disallowed a proportionate interest of ?25,16,719 under Section 14A, which the AO failed to examine. The assessee argued that the investments were made from its own funds, and hence, Section 14A was not applicable. The ITAT found that the AO did not verify this claim during the original assessment. However, the ITAT allowed the assessee's appeal on this issue, subject to verification that no exempt income was received during the relevant assessment year, referencing the Delhi High Court's decision in Cheminvest Ltd.

4. Capitalization of Interest on Capital Work-in-Progress:
The Pr. CIT noted that the AO failed to capitalize proportionate interest of ?12,52,250 on capital work-in-progress. The assessee claimed that the capital work-in-progress was funded from internal accruals, not interest-bearing funds. The ITAT remanded this issue to the AO for verification, directing the AO to confirm the assessee's claim that the capital work-in-progress was financed from internal accruals.

Conclusion:
The ITAT dismissed the assessee's appeal against the order under Section 263, confirming the Pr. CIT's revision. The appeal against the assessment order under Section 143(3) read with Section 263 was partly allowed, with the issue of capitalization of interest remanded to the AO for further verification. The ITAT emphasized the necessity of thorough verification by the AO during the assessment process to avoid such revisions.