2024 (3) TMI 90 - AT - Income Tax

Depreciation on landed property - disallow depreciation on land cost and added back to the total income - HELD THAT - No dispute with regard to the legal position as per law that, no provision to claim depreciation on landed properties. In the present case, it is also undisputed fact that the assessee has claimed depreciation on land cost. Therefore, in our considered view there is no error in the reasons given by the AO to disallow depreciation on land cost and added back to the total income. Arguments of the assessee that, the issue has been resolved with the Revenue and the said depreciation on the UDS in land has been reversed and offered to tax for the assessment year 2012-13 - As we are of the considered view that if the assessee has reversed depreciation and credited to profit and loss account, then same can be excluded while computing income for assessment year 2012-13. But, when it comes to allowing depreciation on any asset, said depreciation should be allowed on each year considering value of WDV of the asset. Just because the assessee has claimed depreciation for some years and enjoyed the benefit and later on reversed the claim and offered to tax at its convenience, the claim of the assessee cannot be entered. Therefore, we are of the considered view that the Assessing Officer is right in disallowing depreciation on land for this year. However, if the claim of the assessee is correct that, it has reversed depreciation on land for the assessment year 2012-13 and offered to tax, then the same can be excluded for computing total income. Thus, we direct the AO to verify the claim of the assessee and if the AO found that the claim of the assessee is correct, then we direct the AO to exclude the income offered towards reversal of depreciation while computing total income for the assessment year 2012-13. Disallowance u/s 14A r.w.r. 8D - expenses incurred towards managerial remunerations and other routine administrative expenses - HELD THAT - AO has recorded satisfaction having regard to books of accounts of the assessee that, the assessee has incurred expenses towards managerial remunerations and other routine administrative expenses and a portion of which must have been attributed towards earning of exempt income. It is only after examining the books of accounts, AO came to the conclusion that the assessee incurred administrative and other expenses and said finding that, a portion of such expenses were attributed towards earning of substantial exempt income constitutes satisfaction as required u/s. 14A of the Act and thus, we reject arguments of the assessee. Disallowance computed by the AO and sustained by the ld. CIT(A), in our considered view, although the provisions of Rule 8D of I.T. Rules, 1962 is not applicable for the impugned assessment year, but proportionate expenses relatable to income should be disallowed by applying certain methods. CIT(A) directed the Assessing Officer to restrict the disallowance u/s. 14A to 2% of exempt income. Therefore, we are of the considered view that there is no error in the reasons given by the Assessing Officer and ld. CIT(A) to sustain disallowance u/s. 14A of the Act and thus, we reject ground taken by the assessee. Disallowance of investments written off and debited to profit and loss account - HELD THAT - As respectfully following the decision of Hon ble High Court of Madras in appellant s own case for assessment year 2001-02 2018 (12) TMI 47 - MADRAS HIGH COURT we are of the considered view that write off of diminution in value of investment in other companies is allowable as revenue expenses/loss in terms of section 28 and 37(1) of the Act. Thus, we reverse the findings of the CIT(A) on this issue and direct the Assessing Officer to delete additions made towards disallowance of write off of investment and debited profit and loss account. Addition towards workmen and staff welfare expenses - CIT(A) has given a categorical finding to the Assessing Officer in light of arguments of the assessee that, said expenditure has already been considered in the return of income filed under Fringe Benefit - HELD THAT - There is no cause of grievance with the appellant, when there is a clear finding from the ld. CIT(A) to the effect that the matter may be re-examined in light of averments of the assessee before the first appellant authority. Thus, we are of the considered view that there is no merit in ground taken by the assessee on the issue of computing the value of fringe benefit, in so far as providing travel and conveyance expenses is concerned. CIT(A) has given appropriate relief as per law on the basis of relevant evidences filed by the assessee in so far as computation of value of fringe benefit on workmen and staff welfare expense. CIT(A) has given a direction to the AO to verify the claim of the assessee in respect of travel and conveyance expenses. Therefore, there is no error in the reasons given by the ld. CIT(A) and thus, we are inclined to uphold the order of the CIT(A) and dismiss appeal filed by the assessee. Income recognition - addition towards sale of farmer s security cards - as submitted assessee is following mercantile systems of accounting, income accrues only when the assessee sells the cards to farmers - HELD THAT - As appellant s responsibility to offer income in right assessment year cannot be based on vague reason. Since, the appellant is following mercantile system of accounting, the moment it distributes cards to farmers, income from sale of cards accrues. The appellant has carried out distribution of cards in the assessment year 2007-08 and income pertaining to sale of said cards should be offered to tax for assessment year 2007-08. Therefore, we are of the considered view that, there is no error in the reasons given by the ld. CIT(A) to sustain additions made by the AO for assessment year 2007-08. While computing the income from sale of farmer s security card, the AO should allow expenses fully and wholly incurred for the purpose of earning such income. We further direct the AO to consider the arguments of the assessee that, it has offered income from sale of cards for subsequent assessment year 2008-09 and in case the income is sustained for this assessment year, income offered by the assessee for assessment year 2008-09 should be allowed. AO must carry out necessary verification and in case the arguments of the assessee is correct, then we direct the AO to exclude income from sale of farmers security cards for the assessment year 2008-09. Disallowance u/s. 40(a)(ia) - non-deduction of tax at source on certain expenditure - HELD THAT - If the payee s have paid tax on the amount paid by the assessee and included in their return of income for relevant assessment year, then the sum paid by the assessee without deduction of tax at source cannot be disallowed u/s. 40(a)(ia) of the Act. This proviso has been examined by various courts. Admittedly second proviso to section 40(a)(ia) of the Act came into statue w.e.f. 01.04.2013 and the impugned assessment year is 2012-13. Therefore, we are not going to comment on applicability of said proviso to the case of the assessee for impugned assessment year. We left open the issue to the AO, to verify the applicability of said proviso in light of arguments of the assessee and also other evidences including judicial precedents if any, filed by the assessee to justify its case. Thus, we set aside the issue to the file of the AO and direct the AO to verify the claim of the assessee in light of second proviso to section 40(a)(ia) of the Act and decide the issue in accordance with law. Additions towards interest on accrual basis relating to call deposits and term loan advances given to joint venture companies - HELD THAT - Although, the appellant claims that call deposits and loans given to joint venture companies become NPA, the reasons given by the appellant to treat said loans and call deposits as NPA is not acceptable. The assessee cannot treat call deposits and loan given to joint venture companies as NPA on the basis of financial creditor s decision. The assessee should independently carry out necessary exercise and ascertain whether call deposits and loans given to joint venture companies are NPA or not. Also as long as the loans is continued in the books of accounts, interest which is due on said loans on accrual basis must be brought to tax. AO, after considering relevant facts has rightly made additions towards interest income. Additions towards rent due to staff quarters amounting - Addition on the ground that although the assessee has specified in its notes of account, but did not offer rent due from staff quarters to tax - HELD THAT - When the appellant is following mercantile system of accounting, income pertains to relevant assessment year has to be accounted on accrual basis, whether or not said income has been received during the relevant financial year. Since, the appellant has reported rent due from staff quarters for the ending 31.03.2008, in our considered view the AO has rightly made additions and thus, we are inclined to uphold the findings of the ld. CIT(A) in sustaining the additions made by the Assessing Officer and reject ground taken by the assessee. Addition towards revenue recognition in respect of land lease deposit received by the assessee for allotment of industrial land in SEZ on long term lease basis - HELD THAT - We are of the considered view that land lease deposit received by the appellant for transfer of land along with title, right and interest for long term lease of 90/99 years to the extent of non-refundable deposit should be considered as income as and when the income accrues to the assessee. Since, the appellant has received upfront lease deposit, when the land has been leased out, in our considered view, the appellant ought to have recognized the income in the profit and loss account in the year of receipt. Since, the appellant has not recognized the income even though said income accrues to the appellant in the relevant assessment years, in our considered view, the AO has rightly taxed lease land deposit on accrual basis and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject grounds taken by the assessee. MAT - re-computation of book profit u/s. 115JB of the Act by making additions towards depreciation on land - HELD THAT - The assessee has made excessive claim of depreciation in the books of accounts towards undividend land cost, even though there is no provision under Income-tax Act, 1961 to allow depreciation on land. Since, the appellant has made a wrong claim, in our considered view disallowance of depreciation on land should be added back to the book profit computed u/s. 115JB of the Act. Therefore, we are of the considered view that there is no error in the reasons given by the CIT(A) to sustain additions made by the Assessing Officer towards depreciation to book profit computed u/s. 115JB of the Act. Thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the assessee. Disallowance u/s. 14A r.w.r. 8D towards expenditure relatable to earning exempt income - It is the argument of the Ld. Counsel for the assessee that while computing disallowance under Rule 8D(2)(iii) of I.T. Rules, 1962, the Assessing Officer has taken all investments including investment which did not yield exempt income - HELD THAT - The matter needs re-look from the Assessing Officer. Therefore, we are of the considered view that the issue needs to go back to the file of the Assessing Officer and thus, we set aside the order of the ld. CIT(A) on this issue and set aside the issue to the file of the Assessing Officer and direct the Assessing Officer to reconsider the issue in light of our discussion given herein above and consider only those investments which yielded exempt income for the relevant assessment year for computing disallowance under Rule 8D(2)(iii) of I.T. Rules, 1962.

Summary

Issues Involved:

1. Disallowance of Depreciation on Land
2. Disallowance of Expenses Relatable to Earning Exempt Income under Section 14A
3. Disallowance of Investments Written Off
4. Assessment of Fringe Benefit
5. Revenue Recognition on Land Lease Deposit
6. Re-computation of Book Profit under Section 115JB

Summary of Judgment:

1. Disallowance of Depreciation on Land:
The assessee claimed depreciation on land and building at MHU Complex, CIT Nagar, Nandanam, Chennai. The Assessing Officer disallowed depreciation on land cost, as per the provisions of the Income-tax Act, 1961, which does not allow depreciation on land. The CIT(A) confirmed the disallowance. The Tribunal upheld the disallowance but directed the Assessing Officer to verify if the depreciation was reversed and offered to tax in the assessment year 2012-13, and if so, to exclude the income offered towards reversal of depreciation while computing the total income for that year.

2. Disallowance of Expenses Relatable to Earning Exempt Income under Section 14A:
The Assessing Officer disallowed expenses relatable to exempt income under Section 14A read with Rule 8D of the Income-tax Rules, 1962. The CIT(A) scaled down the disallowance to 2% of the exempt income. The Tribunal upheld the CIT(A)'s decision, stating that the Assessing Officer had recorded satisfaction regarding the disallowance, and the proportionate expenses should be disallowed by applying certain methods.

3. Disallowance of Investments Written Off:
The assessee wrote off investments in subsidiary and associate concerns amounting to Rs. 1,99,48,306/-. The Assessing Officer disallowed the write-off, treating it as a capital loss. The CIT(A) confirmed the disallowance. The Tribunal, following the decision of the Hon'ble Madras High Court in the assessee's own case, held that the write-off of diminution in the value of investment is allowable as revenue expenses/loss under Section 28 and 37(1) of the Act and directed the Assessing Officer to delete the disallowance.

4. Assessment of Fringe Benefit:
The Assessing Officer assessed the value of fringe benefits, including staff welfare expenses and traveling expenses. The CIT(A) partly allowed the appeal, directing the Assessing Officer to exclude certain amounts and verify the claim regarding traveling expenses. The Tribunal upheld the CIT(A)'s decision, stating that the assessee could not furnish evidence for certain expenses and directed the Assessing Officer to verify the claim regarding traveling expenses.

5. Revenue Recognition on Land Lease Deposit:
The assessee received land lease deposits for allotting land on long-term lease in SEZ. The Assessing Officer treated the entire lease deposit as income in the year of receipt, considering it as a transfer of land. The CIT(A) confirmed the addition. The Tribunal upheld the decision, stating that the lease transaction for 90/99 years amounts to a transfer, and the lease deposit should be recognized as income in the year of receipt, excluding the refundable 15% deposit.

6. Re-computation of Book Profit under Section 115JB:
The Assessing Officer re-computed the book profit by adding back the disallowed depreciation on land. The CIT(A) confirmed the re-computation. The Tribunal upheld the decision, stating that the disallowance of depreciation on land should be added back to the book profit computed under Section 115JB, as the assessee made an excessive claim of depreciation.

Conclusion:
The appeals for assessment years 2006-07 and 2008-09 were dismissed, while the appeals for assessment years 2007-08, 2011-12, 2012-13, and 2013-14 were partly allowed for statistical purposes.