2016 (5) TMI 1170 - AT - Income Tax

Disallowance u/s 14A - Held that - Even if the investment did not yield any dividend in the year under consideration the disallowance under section 14A of the Act on the expenditure incurred for earning income is warranted notwithstanding the fact that no such income was earned. Further we find that while making investment the element of expenditure involved in the process cannot be ruled out. However this expenditure may not be direct. Thus there is an expenditure involved in making these investments. Therefore there is a need to identify and apportion a reasonable amount of expenses as attributable for earning the exempted income. After taking various factors into consideration came to a conclusion that such expenses can be reasonably calculated @ 0.5% of the average investments made by the assessee. For this purpose the legislature has arrived at a common formula to calculate the expenses @ 0.5% of the average investments made as per step-3 of the formula given in Rule-8D. Accordingly the legislature incorporated and introduced the Rule-8D. Further as could be seen from the assessment order the Assessing Officer has rightly quantified the expenditure under Rule 8D(2)(iii) and disallowed under section 14A of the Act. - Decided against assessee Disallowance of additional depreciation under section 32(1)(iia) - whether the assessee is entitled to carry forward 50% of additional depreciation in the succeeding year when the plant and machinery was put in use less than 180 days in the preceding previous year? - Held that - Assessee is entitled to claim 50% of additional depreciation in the succeeding year when the plant and machinery was put in use for less than 180 days in the preceding previous year. Thus respectfully following the decision in the case of Automotive Coaches & Components Ltd. v. DCIT (2016 (4) TMI 34 - ITAT CHENNAI ) we direct the Assessing Officer to allow 50% of additional depreciation in the succeeding year as claimed by the assessee. - Decided against revenue

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 by applying Rule 8D(iii).
2. Disallowance of additional depreciation under Section 32(1)(iia) of the Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A by applying Rule 8D(iii):

The assessee, engaged in the business of printing, filed a return of income admitting a total income of ?2,82,68,850/-. The Assessing Officer (AO) completed the assessment under Section 143(3) by making various additions, including a disallowance under Section 14A by applying Rule 8D(iii). The assessee received dividend income and long-term capital gains, both exempt under Sections 10(34) and 10(38) respectively. The AO determined that the assessee had not attributed any portion of the expenditure debited to the P&L account towards earning the exempt income. The AO applied Rule 8D to compute the disallowance, which was confirmed by the CIT(A).

The Tribunal noted that the assessee had sufficient own funds to cover its investments, and the interest debited could not be attributed to borrowings for exempt income investments. However, the CIT(A) confirmed the disallowance under Rule 8D(2)(iii), citing decisions from ITAT Delhi and Chennai Benches which held that indirect management and administrative expenses qualify for disallowance under Section 14A. The Tribunal upheld this view, stating that whether or not the assessee earned any exempt income, once investments are made, the related management and administrative expenses qualify for disallowance under Section 14A. The Tribunal dismissed the assessee's ground on this issue.

2. Disallowance of additional depreciation under Section 32(1)(iia):

The assessee claimed additional depreciation amounting to ?15,95,635/- under Section 32(1)(iia) for the assessment year 2008-09, including a balance claim from the preceding previous year. The AO disallowed this claim, stating that additional depreciation is allowable only on new plant and machinery and there is no provision for carrying forward the balance additional depreciation to subsequent years. The CIT(A) confirmed this disallowance.

On appeal, the Tribunal referred to decisions from the Cochin Bench of ITAT and the Karnataka High Court, which allowed the balance additional depreciation in subsequent years if the machinery was used for less than 180 days in the year of acquisition. The Tribunal cited the case of Automotive Coaches & Components Ltd. v. DCIT, which held that the balance 50% of additional depreciation should be allowed in the subsequent year. The Tribunal found that the issue was covered in favor of the assessee and directed the AO to allow the balance 50% of additional depreciation in the succeeding year. Thus, the ground raised by the assessee was allowed.

Conclusion:

The Tribunal partly allowed the appeal filed by the assessee, dismissing the ground on disallowance under Section 14A by applying Rule 8D(iii), and allowing the ground on disallowance of additional depreciation under Section 32(1)(iia). The order was pronounced on April 26, 2016, in Chennai.