2012 (12) TMI 865 - AT - Income Tax

Depreciation on the Uninterrupted Power Supply ( UPS ) - disallowing 80% as UPS is not an energy saving device but instead an energy supply device - Held that - Legislature in its wisdom has chosen to show an Automatic Voltage Controller as an electrical equipment eligible for 100% depreciation, falling under the broader head of energy saving devices. Thus once Legislature deemed that an Automatic Voltage Controller is a specie falling within energy saving device, it is not for the AO or CIT(A) to further analyse whether such an Item would indeed an energy saving device. In fact it is beyond their powers. Whether an UPS is an Automatic Voltage Controller ? - As it is mentioned in the product brochure that the UPS automatically corrected low and high voltage conditions and stepped up low voltage to safe output levels. Thus there cannot be a quarrel that UPS was not doing the job of voltage controlling automatically. Even when it was supplying electricity at the time of power voltage, the outages remained controlled. Therefore a UPS would definitely fall under the head of Automatic Voltage Controller eligible for claiming 100% depredation on UPS - in favour of assessee. Disallowance of interest on loan given to subsidiaries - Held that - Finding substance in the submission of the assessee that no disallowance could be made in respect of the opening balances of loans and advances which were coming from earlier years and in which there were no disallowance as supported by the judgment in case of Sridev Enterprises (1991 (1) TMI 52 - KARNATAKA HIGH COURT) in which it was held that in case loans and advances were being carried forward from earlier years in which there was no disallowance, no disallowance could be made in respect of the opening balance in the current year as the nature and status of the advances on the first day of the current year remained the same as the nature and status of the advances on the last day of preceding year - A categorical finding has been given by the AO that the average interest cost for the AY 2006-07 and 2007-08 are 4.86% and 4.72 % respectively. The assessee had charged @ 6% interest from its subsidiary, therefore, the assessee has charged more interest rate than the average interest rate borne by it on interest bearing funds. Therefore, there is no justification for making any addition - in favour of assessee. Leave encashment expenses - disallowance on ground of double deduction - Held that - The assessee had been making the claim earlier on the basis of actuarial valuation but consequent to the amendment of section 438 the claim was being made on payment basis from A.Y.2003-04. AO has made estimated disallowance out of the claim made on payment basis on the ground that part of the payments made may relate to earlier year when these were allowed on actuarial basis. AO has made disallowance on estimate which cannot be sustained. Only the payment which had actually been allowed earlier can be disallowed - as matters require fresh examination and disallowance has to be restricted to the amounts allowed in the earlier year restore the issue to the file of AO for passing a fresh order - in favour of assessee for statistical purposes.

Issues Involved:
1. Disallowance of 80% depreciation on UPS.
2. Disallowance of interest expenditure on loans given to subsidiaries.
3. Disallowance of leave encashment expenses.
4. Deletion of excess depreciation on motor vehicles by the CIT(A).
5. Reduction of disallowance on account of interest on interest-free/concessional loans to subsidiary companies by the CIT(A).

Issue-wise Detailed Analysis:

1. Disallowance of 80% Depreciation on UPS:
The primary issue is whether the UPS qualifies as an energy-saving device eligible for 80% depreciation. The assessee argued that UPS is an energy-saving device, citing prior Tribunal decisions in their favor for Assessment Years 2002-03 to 2005-06. The Tribunal reiterated that an UPS qualifies as an "Automatic Voltage Controller" under the broader category of energy-saving devices, thus eligible for higher depreciation. Consequently, the Tribunal allowed the assessee's claim for 80% depreciation on UPS for both Assessment Years 2006-07 and 2007-08.

2. Disallowance of Interest Expenditure on Loans Given to Subsidiaries:
The assessee had given interest-free and subsidized loans to its associated concerns. The Assessing Officer disallowed part of the interest expenditure, arguing that the loans were not wholly and exclusively for business purposes. The Tribunal, referencing prior decisions and the Karnataka High Court's judgment in Commissioner of Income-tax v. Sridev Enterprises, held that no disallowance should be made for loans carried forward from previous years. For subsidized loans, the Tribunal noted that the interest charged by the assessee (6%) was higher than its average borrowing cost (4.86% for AY 2006-07 and 4.72% for AY 2007-08). Therefore, the Tribunal deleted the entire disallowance for both years.

3. Disallowance of Leave Encashment Expenses:
The issue was whether the leave encashment expenses claimed on an actual basis led to double deduction, as they might have been claimed in earlier years based on actuarial valuation. The Tribunal referred to its earlier decisions for Assessment Years 2003-04 to 2005-06, which required a fresh examination by the Assessing Officer to ensure that only amounts allowed in earlier years were disallowed. The Tribunal directed the Assessing Officer to re-examine the issue for both Assessment Years 2006-07 and 2007-08.

4. Deletion of Excess Depreciation on Motor Vehicles by the CIT(A):
The revenue contested the CIT(A)'s decision to delete excess depreciation on motor vehicles amounting to Rs. 4,77,840. The Tribunal did not specifically address this issue in the provided judgment text, implying that the Tribunal upheld the CIT(A)'s decision.

5. Reduction of Disallowance on Account of Interest on Interest-free/Concessional Loans to Subsidiary Companies by the CIT(A):
The revenue also challenged the CIT(A)'s reduction of disallowance on interest for interest-free/concessional loans to subsidiary companies. The Tribunal upheld the CIT(A)'s decision to reduce the disallowance, finding that the interest charged by the assessee was higher than its average borrowing cost.

Conclusion:
The Tribunal allowed the appeals filed by the assessee regarding the depreciation on UPS and interest expenditure on loans, while it restored the issue of leave encashment expenses to the Assessing Officer for re-examination. The revenue's appeal was dismissed, affirming the CIT(A)'s decisions on excess depreciation on motor vehicles and interest disallowance on loans to subsidiaries.

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