2012 (8) TMI 549 - AT - Income Tax

Disallowance of Loss on sale of worn-out machinery - Held that - Provisions of section 32(1)(iii) relates to depreciation in case of Building, Machinery, Plant or Furniture in respect of which depreciation as claimed and allowed under Clause (1) and which is sold, discarded, demolished or destroyed in the previous year and that in every case the discarded/obsolete machineries need not be sold and can be used in the business of the assessee as a raw material - the matter is restored to the file of the AO for verification - in favour of assessee. Disallowance u/s. 14A - Held that - From the copy of the balance sheet the investment during the impugned assessment year has gone down as against that was on 31-03-2004 and the share capital and free reserves of the assessee company has gone upto Rs. 12.68 Crores as on 31-03-2005. There is no finding given by the AO or the learned CIT(A) that any part of the borrowed fund has been utilised for acquiring shares and bonds the income of which is exempt from tax - the provisions of Rule 8D are not applicable to the impugned assessment year as would apply with effect from AY 2008-09 and since the free reserves and share capital of the assessee company is substantially high as against the amount of investment in shares, therefore no disallowance u/s. 14A is required - in favour of assessee. Disallowance of depreciation on windmill - Held that - AO following the order of his predecessor for AY 2004 - 05 has disallowed the claim of higher depreciation and made the addition which was reversed by the Tribunal and the CIT(A) while adjudicating the issue for Assessment Year 2005-06 has followed the order of the Tribunal in assessee s own case for Assessment Year 2004-05 - no infirmity in the order of CIT(A) for allowance of claim - in favour of assessee. Disallowance towards amounts receivable from PCMC and Cenvat - Held that - CIT(A) upheld the disallowance on the ground that Octroi and Central Excise/CENVAT which are sums payable by the assessee by way of tax, duty, cess or fee within the meaning of section 43B and therefore are allowable only for the previous year in which the same is actually paid irrespective of the previous year in which the liability to pay such sum was actually incurred by the assessee according to the method of accounting regularly employed by them.Since the assessee in the instant case has admitted that these amounts pertain to earlier years, therefore, he disallowed the claim of the assessee - against assessee.

Summary

Issues Involved:
1. Disallowance of loss on sale of worn-out machinery.
2. Disallowance under Section 14A of the Income Tax Act.
3. Depreciation on windmill components.
4. Disallowance of advances no longer receivable.

Detailed Analysis:

1. Disallowance of Loss on Sale of Worn-out Machinery:
Grounds by Assessee: The learned CIT(A) erred in confirming the disallowance of Rs. 13,67,183/- claimed towards loss on sale of worn-out machinery.

Grounds by Revenue: The Ld. CIT(A) was unjustified in deleting the disallowance of the same amount when the assessee failed to substantiate whether the scrap was used in the business or reflected in stock.

Facts: The assessee company, engaged in the business of Alloy, Iron casting, and components for Automobiles and Internal combustion Engines, claimed a loss on sale of scrap machinery. The AO disallowed this, considering it a capital asset loss and not reflected in stock. The CIT(A) partially allowed the claim, recognizing the practical use of scrap in production but upheld the disallowance in principle under Section 32(1)(iii).

Judgment: The ITAT restored the issue to the AO for verification, directing the AO to decide the issue afresh after giving the assessee an opportunity to be heard.

2. Disallowance under Section 14A:
Grounds by Assessee: The CIT(A) erred in not deleting the disallowance of Rs. 25,411/- and Rs. 18,089/- invoked by the AO under Section 14A.

Facts: The AO disallowed a portion of the interest expense, attributing it to exempt income from bonds and dividends. The CIT(A) directed the AO to work out the disallowance under Rule 8D.

Judgment: The ITAT found that the assessee's share capital and free reserves were sufficient to cover the investments, and no part of the borrowed fund was used for exempt income investments. Therefore, no disallowance under Section 14A was warranted, and the ground was allowed.

3. Depreciation on Windmill Components:
Grounds by Revenue: The CIT(A) was unjustified in deleting the disallowance of depreciation on windmill components, including civil construction work, transformer, and DP.

Facts: The AO disallowed higher depreciation rates for windmill components, following a previous year's order. The CIT(A) allowed the claim based on the Tribunal's decision in the assessee's favor for the previous year.

Judgment: The ITAT upheld the CIT(A)'s order, affirming the higher depreciation rate for windmill components, as previously decided by the Tribunal in the assessee's favor.

4. Disallowance of Advances No Longer Receivable:
Grounds by Assessee: The CIT(A) erred in confirming the disallowance of Rs. 2,70,490/- and Rs. 19,25,905/- towards amounts receivable from PCMC and CENVAT, respectively.

Facts: The AO disallowed these amounts, considering them related to earlier years and not the current assessment year. The CIT(A) upheld this, citing Section 43B, which allows such sums only in the year they are actually paid.

Judgment: The ITAT upheld the CIT(A)'s decision, agreeing that these amounts pertained to earlier years and were not allowable for the current assessment year. The decisions cited by the assessee were found distinguishable and not applicable.

Conclusion:
- Cross appeals for A.Y. 2005-06: Partly allowed for statistical purposes.
- Appeal for A.Y. 2006-07 by the assessee: Partly allowed.

Pronounced in the open Court on 25th June 2012.