2017 (8) TMI 405 - AT - Income Tax

Disallowance of interest made u/s 14A applying Rule 8D(2)(ii) - Held that - it is quite evident that the Share Capital and Reserve & Surplus available with the assessee company at the beginning of the year as well as at the close of the year under consideration are enough to cover the investments in question and, therefore, following the ratio of the judgment of the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT) it gives rise to a presumption that such investments have come out of interest free-funds. The said proposition is equally applicable in the context of section 14A of the Act, therefore, in the above background, we have no hesitation to delete the disallowance of interest made by the Assessing Officer under section 14A of the Act. Disallowance of administrative expenses - recorded satisfaction about incorrectness of assessee s claim - Held that - In the absence of the recording of the necessary satisfaction, in our view, it was wrong on the part of the Assessing Officer to determine the disallowance under section 14A by applying Rule 8D(2)(iii) of the Rules. Adoption being the expenditure relatable to the earning of the impugned dividend income - Held that - The assessee explained that the dividend receipt from Mutual Funds was merely by way of dividend reinvestment plan in terms of which dividend is reinvested automatically and no effort is required for collecting such dividend. The assessee has also explained the basis of arriving at the aforesaid expenditure, being a percentage of remuneration paid to the employees looking after the activity of the Mutual Fund investments. Considering the entirety of facts and circumstances, especially the fact that the explanation furnished by the assessee has been completely brushedaside, we find no reason to uphold the action of the Assessing Officer in applying Rule 8D(2)(iii) of the Rules in order to compute the disallowance envisaged under section 14A of the Act. Therefore, we set-aside the order of the CIT(A) on this aspect also and direct the Assessing Officer to retain the suo-motu disallowance of ₹ 70,276/- made by the assessee and delete the balance. Depreciation in respect of Badminton court - Held that - It was a common point between the parties that in the earlier years, similar issue has been decided by the Tribunal in favour of the assessee and such decisions continue to hold the field as the same have not been altered by any higher authority. Addition u/s 40A - payment made by the assessee to cover the deficit of a school run at village Mankahari, Satna - Held that - It was a common point between the parties that similar payment has been held to be an allowable deduction in the earlier year for assessment year 2005-06. Following the aforesaid precedent, and since the facts and circumstances remain the same, we direct the Assessing Officer to allow the claim of the assessee. Depreciation on UPS - @15% treating it as a part of Plant & Machinery OR @60% as part of computer - Hel that - In assessment year 2005-06, the upheld the claim of the assessee for depreciation @60%. Following such precedent, which continues to hold the field, we uphold the claim of the assessee for depreciation on UPS @ 60%. Thus, assessee succeeds on this aspect. Exchange fluctuation loss - claim disallowed on the ground that loss on account of restatement of foreign currency could not be allowed as revenue expenditure - Held that - The issue has been decided in favour of the assessee following the decision of the Hon ble Supreme Court in the case of Woodward Governor India P. Ltd.(2009 (4) TMI 4 - SUPREME COURT) as held the loss on account of exchange rate fluctuation was allowable as a revenue expenditure. In view of the aforesaid precedent, the decision of the CIT(A) is affirmed and Revenue fails on this aspect. Claim of depreciation restricted - Held that - Assessing Officer reworked the written down value of the assets assuming that the depreciation for assessment years 2000-01 and 2001-02 stood allowed, though in actuality such a claim was neither made and nor allowed by the Assessing Officer in those years. As a result, the depreciation claimed by the assessee stood reduced. The CIT(A) has since negated the action of the Assessing Officer and restored the claim of the assessee for depreciation. The decision of the CIT(A) is based on the decision of his predecessor CIT(A) in the case of the assessee for 2006-07. The decision of the CIT(A) for assessment year 2006-07 wherein the decision for assessment year 2005-06 has been followed. The precedents so noted continue to hold the field and, therefore, we find no reason to interfere with the decision of the CIT(A) on this aspect. Thus, on this aspect also Revenue fails.

Issues Involved:
1. Disallowance under section 14A.
2. Depreciation on UPS.
3. Reimbursement of expenses for running a school.
4. Depreciation on Badminton court.
5. Exchange rate fluctuation loss.
6. Depreciation for earlier years.
7. Nature of Sales tax/VAT subsidy.

Detailed Analysis:

1. Disallowance under Section 14A:
The assessee contested the disallowance of ?1,83,70,327 under section 14A, arguing that the Assessing Officer (AO) erroneously considered interest expenses for the calculations under Rule 8D(ii) despite no borrowed funds being used for investments. The AO disallowed ?1,75,28,793, contrasting the assessee's suo-motu disallowance of ?70,276. The Tribunal found the AO's action misplaced, noting no nexus between interest expenditure and exempt income investments. The AO failed to record satisfaction about the incorrectness of the assessee's claim before applying Rule 8D. Thus, the Tribunal deleted the interest disallowance and upheld the assessee's disallowance of ?70,276.

2. Depreciation on UPS:
The assessee claimed depreciation at 60% for UPS, treating it as part of the computer, while the AO allowed only 15%, treating it as plant and machinery. The Tribunal upheld the assessee's claim of 60%, following the precedent set in the assessment year 2005-06.

3. Reimbursement of Expenses for Running a School:
The assessee incurred ?34,23,082 for running a school at village Mankahari, Satna, which the AO disallowed under section 40A(9). The Tribunal directed the AO to allow the claim, following the precedent where similar expenditure was allowed in earlier years.

4. Depreciation on Badminton Court:
The Tribunal allowed the assessee's claim for depreciation on the Badminton court amounting to ?12,657, following the decisions in earlier years where such claims were upheld.

5. Exchange Rate Fluctuation Loss:
The AO disallowed the exchange rate fluctuation loss of ?1,29,889, treating it as a capital expenditure. The CIT(A) allowed the claim, noting it was for working capital requirements. The Tribunal affirmed the CIT(A)’s decision, following the precedent and the Supreme Court judgment in CIT v. Woodward Governor India P. Ltd.

6. Depreciation for Earlier Years:
The AO restricted the depreciation claim to ?13,71,85,165 from ?18,61,04,063, invoking Explanation 5 to section 32(1), assuming depreciation for earlier years was allowed. The CIT(A) restored the assessee's claim, which the Tribunal upheld, following earlier decisions.

7. Nature of Sales Tax/VAT Subsidy:
The assessee raised an additional ground regarding the ?49,59,49,871 received as Sales tax/VAT subsidy, arguing it should be treated as capital in nature. The Tribunal admitted the additional ground and remitted the matter to the AO for a decision in accordance with the law, following the precedent in the assessment year 2005-06.

Conclusion:
The assessee's appeals were partly allowed, with significant relief granted on disallowance under section 14A, depreciation on UPS, reimbursement for running a school, and depreciation on the Badminton court. The Revenue's appeals were dismissed, affirming the CIT(A)'s decisions on exchange rate fluctuation loss and depreciation for earlier years. The matter of Sales tax/VAT subsidy was remitted to the AO for reconsideration.

← Previous Next →