2019 (4) TMI 690 - AT - Income Tax

Simultaneous claim of depreciation and deduction of depreciation write back - amount redited in P& L Account due to change in the method of providing depreciation as per the Companies Act 1956 - WDV to straight line method - HELD THAT - While preparing the computation of total income, assessee reduced above sum from the net profit as per profit and loss account as same was not chargeable to tax as it is merely a book adjustment on account of change in the method of depreciation. It is also supported by the guidelines issued by ICAI. The lower authorities have not understood the correct treatment of the same as the above item credited to the profit and loss account is merely book adjustment by which the profit in the books of account have gone up and as it does not have any tax impact, same is correctly reduced from the taxable income of the assessee. It has nothing to do with the claim of the depreciation on assets which is terms of the provision of section 32 of the Income tax Act. Hence we reverse the finding of the lower authorities and direct the AO to delete the disallowances - Decided in favour of assessee Addition u/s 14A r.w.r.8D - disallowance of interest and indirect expenses - HELD THAT - Assessee has made investment in shares and mutual funds income of which is exempt from tax. It is also apparent that assessee has share capital and reserve which is far in excess of amount invested in mutual funds where from exempt income may be derived. Therefore, respectfully following the decision of HDFC Bank Ld. Vs. CIT 2014 (8) TMI 119 - BOMBAY HIGH COURT it is a parent that disallowances on account of interest expenditure cannot be made under rule 8D of the Income Tax Rules 1962 u/s 14A. Further, the ld AO has disallowed indirect expenses equal to 0.5 % on an average investment to which assessee also agreed. It was also admitted by the assessee before the lower authorities. In view of this we direct the ld AO to restrict the disallowances u/s 14A of the Act to ₹ 270481/- only - Decided partly in favour of assessee.

Summary

Issues:
1. Addition of depreciation amounting to ?1,96,10,677.
2. Disallowance of ?29,91,405 made by the Assessing Officer.
3. Disallowance under section 14A read with Rule 8D.

Analysis:

Issue 1: Addition of Depreciation
The appeal was filed against the order confirming the addition of depreciation amounting to ?1,96,10,677. The assessee claimed depreciation under section 32 of the Income Tax Act and reduced the total taxable income by the depreciation written back of ?20,38,4058. The Assessing Officer disallowed the second deduction as the assessee had already been granted deduction under section 32. The Tribunal noted that the depreciation difference arose due to a change in the method of providing depreciation, resulting in excess depreciation provided by the assessee. The adjustment was a book entry as per the ICAI guidelines and did not impact the taxable income. The Tribunal directed the Assessing Officer to delete the disallowance of ?1,96,10,677, allowing grounds 1 to 3 of the appeal.

Issue 2: Disallowance by Assessing Officer
The Assessing Officer disallowed ?29,91,405 under section 14A of the Act. The assessee invested in shares and mutual funds, and the Assessing Officer invoked Rule 8D for the disallowance. The Tribunal found that the disallowance on interest expenditure under Rule 8D was incorrect as the share capital and reserves of the assessee exceeded the investment amount significantly. Following the decision of the Bombay High Court, the Tribunal directed the Assessing Officer to restrict the disallowance under section 14A to ?2,70,481, partly allowing grounds 4 to 6 of the appeal.

Issue 3: Disallowance under Section 14A
The Tribunal concluded that disallowances on interest expenditure under Rule 8D were not justified due to the substantial share capital and reserves of the assessee compared to the investment amount. The disallowance was restricted to ?2,70,481, in line with the assessee's offer during the assessment proceedings. The Tribunal partly allowed the appeal, directing the Assessing Officer to restrict the disallowance under section 14A to the agreed amount.

In conclusion, the Tribunal partly allowed the appeal filed by the assessee, reversing the addition of depreciation and restricting the disallowance under section 14A to a lesser amount based on the circumstances of the case.