2016 (8) TMI 556 - AT - Income Tax

Grant of depreciation - Held that - We have observed that the assessee company has claimed depreciation on certain assets which were acquired by the assessee company being in the nature of UPS, routers, switches and cables, projector, pipes and racks etc. for which the assessee company is claiming depreciation @ 60%. However, the same was denied by the A.O. The ld. CIT(A) allowed depreciation @ 60% on routers. In our considered view, the assessee company acquired the fixed assets and if the same are forming an integral parts of the computer system which can be used along with a computer and when their functions can be integrated with a computer, depreciation is to be allowed @ 60%. However it should be segregated as indicated above and as such we set aside matter back to the file of the A.O. with a direction to review the entire list of fixed items and the items which are an integral parts of the computers which can be used along with a computer and when their functions can be integrated with a computer, the depreciation is to be allowed @ 60% and for the rest of the items in the list, depreciation @ 15% may be allowed. Additions made to the book profit computed u/s 115JB of the Act on account of provision for doubtful debts - Held that - We have observed that Income Tax Act,1961 was amended by Finance Act, 2004 w.e.f 1-4-2001 by substitution of clause (i) of Explanation1 to Section 115JB of the Act whereby the amount or amounts set aside as provision for diminution in the value of any asset is to be added back to the profit of the assessee as per Profit and Loss Account to arrive at Book Profit u/s 115JB of the Act which is clearly applicable to Provision for doubtful debt of ₹ 15,29,058/- debited to Profit and Loss Account by the assessee and the same is ordered to be added back to Profit as per Profit and Loss Account to determine book profit as per amended provision of Section 115JB of the Act. This ground of appeal raised by the assessee company is therefore dismissed. Provisions for gratuity and provision for leave encashment based on actuarial valuation conducted by the acturial is an ascertained liability which shall not be added to Profit of the assessee as per Profit and Loss Account to compute Book profit u/s 115JB Employees contribution towards provident fund paid by the assessee company before the due date prescribed under the Income Tax Act,1961 for filing return of income u/s 139(1) of the Act be allowed of which the payment details are duly reflected in the assessment order Entitlement for deduction of FBT to arrive at the book profit for the purposes of computation of Book Profit u/s 115JB - Held that - We find merit in the contention of the assessee company after going through the records before us and have observed that the assessee company is entitled for deduction of FBT to arrive at the book profit for the purposes of computation of Book Profit u/s 115JB of the Act. On the other hand the A.O. has reduced the losses by amount of FBT instead of increasing losses to arrive at Book Profit u/s 115JB which has led to double jeopardy to the assessee company. Thus, keeping in view of the afore-stated CBDT Circular, the A.O. is directed to re-compute the losses u/s 115JB of the Act whereby the FBT will be allowed to be added to the losses prior to tax as reflected in the audited Profit and loss account to increase the loss to arrive at the book profit u/s 115JB of the Act. We order accordingly.

Issues Involved:
1. Disallowance of depreciation on 'Management Rights'.
2. Disallowance of proportionate depreciation on additions to fixed assets.
3. Disallowance of interest on borrowings for acquisition of 100% share capital of a subsidiary.
4. Disallowance of interest on borrowings presumed to be used for interest-free loans.
5. Disallowance of interest on borrowings presumed to be used for non-business purposes.
6. Additions to book profit under section 115JB for provisions of doubtful debts, gratuity, and leave encashment.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on 'Management Rights':
The assessee claimed depreciation on 'Management Rights' acquired during the year ending March 31, 2005, which was capitalized as intangibles. The AO disallowed this claim, considering it as a non-depreciable capital asset. The CIT(A) upheld this disallowance. The Tribunal, however, allowed the claim, citing the decision in the assessee's own case for earlier assessment years (2005-06 to 2007-08) where the Mumbai Tribunal allowed depreciation on management rights. The Tribunal also referenced the Supreme Court decision in Smifs Securities Ltd., which held that intangible assets in the form of goodwill are eligible for depreciation.

2. Disallowance of Proportionate Depreciation on Additions to Fixed Assets:
The AO disallowed depreciation at 60% on assets such as UPS, switches, and cables, treating them as non-computer items. The CIT(A) partially upheld the AO's decision, allowing 60% depreciation only on routers. The Tribunal set aside the issue back to the AO to review the list of fixed items and allow 60% depreciation on items integral to the computer system, otherwise, 15% depreciation for non-integral items.

3. Disallowance of Interest on Borrowings for Acquisition of 100% Share Capital of a Subsidiary:
The AO disallowed interest on borrowings used to acquire 100% share capital of Kanishka Housing Development Co. Ltd., considering it as non-business expenditure. The CIT(A) upheld this disallowance. The Tribunal set aside the issue back to the AO for fresh determination, following the decision in the assessee's own case for earlier assessment years, where the Tribunal restored the matter to the AO for deciding afresh as per law.

4. Disallowance of Interest on Borrowings Presumed to be Used for Interest-Free Loans:
The AO disallowed interest on borrowings presumed to be used for providing interest-free funds to Palanpur Holdings and Investments Pvt. Ltd. The CIT(A) upheld this disallowance. The Tribunal set aside the issue back to the AO for verification, directing the AO to decide the matter in light of the Bombay High Court decisions in Reliance Utilities and Power Ltd. and HDFC Bank Ltd., which held that if the assessee has sufficient own funds, the presumption is that investments are made from own funds.

5. Disallowance of Interest on Borrowings Presumed to be Used for Non-Business Purposes:
The AO disallowed interest on borrowings presumed to be used for investments in mutual funds. The CIT(A) upheld this disallowance. The Tribunal set aside the issue back to the AO for fresh determination, following the decision in the assessee's own case for earlier assessment years, where the Tribunal restored the matter to the AO for deciding afresh in terms of judicial pronouncements.

6. Additions to Book Profit under Section 115JB for Provisions of Doubtful Debts, Gratuity, and Leave Encashment:
The AO added provisions for doubtful debts, gratuity, and leave encashment to the book profit under section 115JB. The CIT(A) upheld these additions. The Tribunal upheld the addition for doubtful debts, citing the amendment to section 115JB by the Finance Act, 2009. However, for provisions for gratuity and leave encashment, the Tribunal allowed the assessee's claim, following the decision in the assessee's own case for earlier assessment years, where these were treated as ascertained liabilities not includible while computing book profit under section 115JB.

Conclusion:
The appeals were partly allowed, with certain issues being set aside to the AO for fresh determination and others being decided in favor of the assessee based on precedents and judicial pronouncements. The Tribunal's decisions were consistent with earlier rulings in the assessee's own case and relevant judicial precedents.

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