2014 (2) TMI 1114 - AT - Income Tax

Disallowance of the additional depreciation u/s 32(1)(iia) of the Act - Held that - The decision in Deputy Commissioner of Income-tax, Circle 3(1), New Delhi Versus Cosmo Films Ltd. 2012 (9) TMI 281 - ITAT DELHI followed - The additional benefit in the form of additional allowance u/s 32(1)(iia) is one time benefit to encourage the industrialization - This additional benefit is to give impetus to industrialization and the basic intention and purpose of these provisions can be reasonably and liberally held that the assessee deserves to get the benefit in full when there is no restriction in the statute to deny the benefit of balance of 50% when the new plant and machinery were acquired and use for less than 180 days - One time benefit extended to assessee has been earned in the year of acquisition of new plant and machinery - In section 32(1)(iia), the expression used is shall be allowed - Thus, the assessee had earned the benefit as soon as he had purchased the new plant and machinery in full but it is restricted to 50% in that particular year on account of period of usages - Such restrictions cannot divest the statutory right - Law does not prohibit that balance 50% will not be allowed in succeeding year - The extra depreciation allowable u/s 32(1)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage - The so earned incentive must be made available in the subsequent year - The overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of plant and machinery - thus, the order is set aside and the authority directed to extend the benefit - Decided in favour of Assessee. Disallowance made u/s 14A of the Act - Held that - The assessee had not claimed any exempt income - provisions of section 14A were applicable in that year and AO was entitle to make disallowance - But, he should not have invoked the provisions of Rule 8D - thus, the matter remitted back to the AO for fresh adjudication - Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of additional depreciation under Section 32(1)(iia)
2. Disallowance under Section 14A

Issue-wise Detailed Analysis:

1. Disallowance of Additional Depreciation under Section 32(1)(iia):

For AY 2007-08:
- The assessee claimed additional depreciation of 10% on machinery purchased in AY 2006-07, arguing that the balance 10% should be allowed in AY 2007-08.
- The AO disallowed this claim, stating that additional depreciation is to be allowed only in the year of purchase, and if the machinery is used for less than 180 days, only 50% of the depreciation is allowed.
- The CIT(A) upheld the AO's decision, stating that the Act does not provide for carrying forward the balance additional depreciation to subsequent years.
- The Tribunal, however, referenced the case of Cosmo Films Ltd. and other similar cases, ruling that the assessee is entitled to claim the balance 10% additional depreciation in the subsequent year. The Tribunal emphasized that the provisions of Section 32(1)(iia) should be interpreted liberally to promote industrialization and investment in new machinery.

For AY 2008-09:
- The Tribunal followed its earlier ruling for AY 2007-08, allowing the claim for additional depreciation and deciding the issue in favor of the assessee.

2. Disallowance under Section 14A:

For AY 2007-08:
- The AO disallowed Rs. 6,83,301 under Section 14A, allocating proportionate expenditure for earning exempt income, even though the assessee had not shown any exempt income.
- The CIT(A) upheld the AO's decision, referencing the ITAT Special Bench decision in Daga Capital Management (P.) Ltd.
- The Tribunal noted that Rule 8D was not applicable for AY 2007-08 and that the assessee had not claimed any exempt income. The Tribunal remitted the matter back to the AO for fresh adjudication, emphasizing that the AO should not have invoked Rule 8D.

For AY 2008-09:
- The Tribunal acknowledged that Rule 8D was applicable for AY 2008-09 but noted that the AO had not recorded the necessary satisfaction for invoking Rule 8D.
- Following its decision for AY 2007-08, the Tribunal remitted the issue back to the AO for fresh adjudication, instructing the AO to record the necessary satisfaction before making any disallowance under Section 14A read with Rule 8D.

Conclusion:
- The appeals for both AY 2007-08 and AY 2008-09 were partly allowed.
- The Tribunal ruled in favor of the assessee regarding the additional depreciation under Section 32(1)(iia) for both years.
- The disallowance under Section 14A was remitted back to the AO for fresh adjudication for both years, with specific instructions regarding the application of Rule 8D.