2011 (2) TMI 10 - AT - Income Tax

Depreciation on idle assets - CIT (A) has rightly allowed the depreciation on the assets as it is not in dispute that the assets were deployed by the assessee at the site of the customer to meet warranty obligation in respect of contracts executed by it in earlier years. - The assets formed block of assets and depreciaion has been allowed in immediately preceeding year as well as in subsequent years in that view also depreciation was rightly held allowable by CIT(A) Expenditure related to capital assets - The assessee had not capitalized the machine as fixed assets. Even vide notes to the accounts and statutory disclosure under the Companies Act the asses did not have any commitment on capital account for the year and it the immediately preceding yea, therefore, it is somewhat of a presumption of the A.O. that the machine was imported only for own use and on capital account - Expenditure allowable u/s. 37 of the I.T. Act. Commission paid to agents - The payment being made in the normal course of business and after proper authorization by officers of company and when the accounts of assessee company being approved by the Board of Directors and shareholders under the companies Act there should generally be no reason to doubt the appellant. - expenditure allowed Accrued interest on FD - Interest accrued to appellant on release of earnest money has been properly accounted for from year to year and income accruing has been disclosed by appellant in earlier years, previous year and subsequent war as per the method of accounting regularly followed by the appellant Therefore, the A.O. was not justified to disturb the accounting method Furthermore it was also claimed that there is mistake in amount calculated by the A.O. Disallowance u/s 14A for earning exempt dividend income should he restricted to 1% of dividend income.

Issues Involved:
1. Depreciation on fixed assets.
2. Expenditure related to capital assets.
3. Disallowance of commission payment.
4. Accrued interest on fixed deposits.
5. Disallowance under Section 14A.

Issue-wise Detailed Analysis:

1. Depreciation on Fixed Assets:
The revenue contested the allowance of depreciation under Section 32, arguing that the fixed assets were not used during the previous year and remained idle under the custodian control of the Railway Authority. The Assessing Officer had disallowed depreciation of Rs. 12,06,558/- due to the lack of manufacturing activity and absence of raw material purchases. However, the CIT(A) allowed the depreciation, stating that the assets were part of block assets, held for business, and depreciation had been allowed in previous and subsequent years. The Tribunal upheld the CIT(A)'s decision, noting the assets were deployed at the customer's site to meet warranty obligations, thus in continuous use.

2. Expenditure Related to Capital Assets:
The revenue challenged the deletion of Rs. 1,16,029/- as expenditure related to a capital asset. The Assessing Officer had disallowed the expenditure, asserting it was capital in nature since the asset (a machine) was never owned or used by the assessee. The CIT(A) deleted the addition, recognizing the expenditure as normal business expenditure, as the machine was imported for trading, not capitalized, and eventually returned to the supplier. The Tribunal upheld the CIT(A)'s decision, finding no contrary material from the revenue.

3. Disallowance of Commission Payment:
The revenue objected to the deletion of Rs. 8,70,807/- on account of commission payments, arguing there was no evidence of genuine services provided by the commission agents. The Assessing Officer had disallowed the commission due to insufficient justification of the services rendered. The CIT(A) deleted the addition, noting the payments were made against bills approved by company officers and the payees were regular agents assessed to income tax. The Tribunal upheld the CIT(A)'s decision, as the findings were uncontroverted by the revenue.

4. Accrued Interest on Fixed Deposits:
The revenue disputed the deletion of Rs. 3,48,020/- as accrued interest on fixed deposits, asserting it should be assessed on an accrual basis due to the assessee's mercantile system of accounting. The Assessing Officer had added the interest income based on this system. The CIT(A) deleted the addition, explaining the fixed deposits were in the name of the Railways, and the interest was contingent on the release of earnest money after warranty obligations were met. The Tribunal upheld the CIT(A)'s decision, finding no cogent material from the revenue to contradict the findings.

5. Disallowance under Section 14A:
The assessee's cross objection concerned the disallowance of Rs. 35,329/- under Section 14A for administrative expenses related to exempt dividend income. The Assessing Officer had disallowed pro rata expenses, which the CIT(A) upheld. The Tribunal, following its consistent view, restricted the disallowance to 1% of the dividend income, directing the Assessing Officer to adjust the quantum accordingly.

Conclusion:
The appeal of the revenue was dismissed, and the cross objection of the assessee was partly allowed. The order was pronounced in the open court on 11.2.2011.

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