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2024 (5) TMI 1544 - AT - Income TaxDisallowance u/s. 14A r.w. Rule 8D - expenditure incurred for earning exempt income - HELD THAT - Following consistent stand of Tribunal we direct AO to verify whether assessee s own funds are sufficient enough to cover the investment. If so interest disallowance would not be justified.The indirect disallowance of 0.5% should be computed only on those investments which have yielded exempt income during the year. The grounds in all the three years stand allowed for statistical purposes. Recovery of Bad-Debt written off in the books of amalgamating Companies - HELD THAT - In latest decision in 2022 (3) TMI 1634 - ITAT CHENNAI bench held that after amalgamation the assessee has all the rights as well as liabilities of amalgamating company which were transferred to it. Such recoveries of bad-debts were nothing but business receipts for assessee and therefore assessable in its hands. Respectfully following the same we dismiss the grounds urged by assessee in all the three years. Method of recognizing income on hire purchase contracts - HELD THAT - We find that this issue is covered by the latest order of Tribunal 2022 (3) TMI 1634 - ITAT CHENNAI wherein as considered the decision of Hon ble High Court of Madras in assessee s own case who directed Ld. AO to tax the interest income on EMI method or ESM method which was consistently being followed by the assessee and allow consequential relief in accordance with law. Considering the same similar directions were issued by Tribunal. Since facts are pari-materia the same in this year we issue similar directions to Ld. AO in this year to recognize income on such transactions. The assessee is directed to provide the requisite details. The grounds thus raised stand allowed for statistical purpose. Rate of depreciation on UPS - HELD THAT - We find that this issue has been decided by Tribunal in assessee s favor in its latest order 2022 (3) TMI 1634 - ITAT CHENNAI as confirmed first appellate order which allowed depreciation of 60%. Nature of Software Development expenditure - HELD THAT - AO disallowed the revenue expenditure but inadvertently made disallowance of Rs. 152.19 Lacs instead of Rs. 2.79 Lacs - CIT(A) directed Ld. AO to allow depreciation on Rs. 152.19 Lacs. No directions have been given qua expenditure of Rs. 2.79 Lacs which is the grievance of the assessee. AR has submitted that depreciation may be allowed on the remaining amount of Rs. 2.79 Lacs also. Accepting the same we direct Ld. AO to allow depreciation on Rs. 2.79 Lacs. The corresponding ground stand partly allowed. Treatment of Broken Period Interest - HELD THAT - We find that this issue is subject matter of latest Tribunal order 2022 (3) TMI 1634 - ITAT CHENNAI as observed that Ld. CIT(A) did not appreciate the facts of the issue properly. The courts have held that if the securities are regularly purchased and sold they could be stock-in-trade. Therefore the matter was remitted back to the file of Ld. AO for fresh examination with a direction to the assessee to place all the material before Ld. AO. Disallowance of bad Debts - same were mainly related to the hire purchase and mortgage loan transactions - HELD THAT - We find that this issue has been settled in assessee s favor by coordinate bench in its order 2019 (9) TMI 974 - ITAT CHENNAI . The coordinate bench at para 10.3 of the order relying upon order for AY 2001-02 dismissed revenue s appeal. Therefore taking consistent view in the matter we dismiss the grounds raised by the revenue. Indexation benefit while computing Capital Gains on government securities - holding Bonds and Debentures are distinguishable from government securities - HELD THAT - The bench for AY 2003-04 observed that government securities are not excluded from the definition of capital assets. As per Sec. 2(42A) the expression securities shall have the meaning as assigned in Clause-11 of Securities Contract Regulation Act 1956 which includes government securities also. It was thus concluded by the bench that bonds and securities are distinguishable. The bonds are not freely tradable whereas the securities are freely tradable. The Bonds could not be equated with securities. Further from plain reading of 3rd proviso to Sec. 48. Government securities were not excluded for indexation benefit and only bond or debentures were excluded. Accordingly the revenue s grounds were dismissed. Facts being pari-materia the same we dismiss this ground. Rate of Depreciation on Commercial vehicles - HELD THAT - AO erred in disallowing the depreciation claimed by the appellant. The Assessing Officer is directed to allow depreciation at the higher rate of 50% for the new motor vehicles acquired between 1.1.2009 and 30.09.2009 and used for the purposes of their business. The appellant succeeds in this ground.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Disallowance under Section 14A read with Rule 8D The relevant legal framework includes Section 14A and Rule 8D of the Income Tax Act, which disallow expenditure incurred in relation to earning exempt income. The Court considered the Tribunal's earlier decisions in the assessee's own case, which accepted that if the assessee's own funds exceed investments, interest disallowance is unjustified. Furthermore, the 0.5% disallowance should only apply to investments yielding exempt income. The Court directed the Assessing Officer (AO) to verify the sufficiency of the assessee's own funds and apply the 0.5% disallowance only to investments yielding exempt income, allowing the grounds for statistical purposes. Taxability of Recovery of Bad Debts The issue revolves around whether the recovery of bad debts written off in amalgamating companies' books is taxable. The legal framework includes Sections 41(1)(b) and 176(3A) of the Income Tax Act. The Court noted that the Tribunal had previously ruled against the assessee, holding that recoveries of bad debts are business receipts and taxable in the hands of the successor company. The grounds were dismissed following this precedent. Methodology for Recognizing Income on Hire Purchase Contracts The assessee switched from the Even-Spread Method (ESM) to the Internal Rate of Return (IRR) method for accounting purposes but continued using ESM for tax purposes. The Court referenced the Tribunal's earlier decisions and the Madras High Court's directions to tax interest income based on the method consistently followed by the assessee. The AO was directed to follow this approach, allowing the grounds for statistical purposes. Depreciation Rate on UPS Systems The issue concerned the applicable depreciation rate for UPS systems, with the assessee claiming 60% while the AO restricted it to 15%. The Tribunal had previously ruled in favor of the 60% rate, considering UPS as part of the computer block. The Court upheld this view, allowing the grounds in favor of the assessee. Nature of Software Development Expenditure The assessee capitalized software development expenses but claimed them as revenue expenditure. The AO disallowed the revenue claim but made an error in the disallowance amount. The Court directed the AO to allow depreciation on the correct amount, partly allowing the grounds. Treatment of Broken Period Interest The issue involved whether broken period interest should be treated as a revenue item or part of capital gains. The AO treated it as business income, but the CIT(A) allowed it as capital gains. The Court remitted the issue back to the AO for fresh examination, following the Tribunal's earlier order, allowing the grounds for statistical purposes. Disallowance of Bad Debts The disallowance of bad debts related to hire purchase and mortgage loans was contested. The Tribunal had previously ruled in favor of the assessee, allowing the claim. The Court followed this precedent, dismissing the revenue's grounds. Indexation Benefit on Government Securities The issue concerned the eligibility for indexation benefits on government securities. The CIT(A) allowed the benefit, distinguishing government securities from bonds and debentures. The Tribunal had previously ruled in favor of the assessee, and the Court upheld this view, dismissing the revenue's grounds. Rate of Depreciation on Commercial Vehicles The assessee claimed higher depreciation on leased vehicles, which the AO disallowed. The CIT(A) allowed the claim, considering statutory provisions and the Supreme Court's decision in a similar case. The Court upheld the CIT(A)'s decision, dismissing the revenue's grounds. 3. SIGNIFICANT HOLDINGS The Court's significant holdings include:
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