2019 (8) TMI 447 - AT - Income Tax

Disallowance of depreciation - revenue doubts existence of plant and machinery - no agreement place that plant and machinery given on lease by assessee in course of its business - whether claim of depreciation against the assets was owned by assessee and/or it was put to use for purposes of business? - HELD THAT - In facts of present case, authorities below rejected claim of depreciation for the reason that, there is no asset, as has been claimed by assessee, and that, no such assets has been used for purposes of business which generated any income, on which claim of depreciation could be computed. Mere existence of plant and machinery on which depreciation is claimed has been doubted, and assessee has not been able to substantiate the same by way of any agreements entered into by it, with parties to which plant and machinery has been released on hire purchase. Even in the preceding years assessee has not been able to establish existence of plant and machinery by way of corroborative evidences. Before us, Ld.AR was called to file documents in respect of existence of plant and machinery on which depreciation is claimed. No evidence to establish prima facie existence of machinery has been brought on record. Under such circumstances ratio of decisions relied upon by Ld. ar is not applicable to the facts of present case. - Decided against assessee. Addition u/s 14A in computing book profit u/s 115 JB (2) Explanation 1 clause (f) - HELD THAT - Admittedly, there is no exempt income earned during the year by assessee. This issue therefore stands covered by the ratio laid down by Delhi Special Bench in case of ACIT vs Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI . We therefore direct AO to delete disallowance computed under section 14 A while computing book profits. Suo-moto disallowance computed by assessee u/s 14A in regular provisions - HELD THAT - It is a legal claim of assessee that by assessee inadvertently even though no exempt income was earned during the year under consideration may be deleted by following the ratio laid down by Hon able Delhi High Court in case of CIT vs Chem Investment 2015 (9) TMI 238 - DELHI HIGH COURT . As the issue is set aside to Ld.AO in respect of book profit computation, we direct Ld.AO to consider assessee s claim of disallowance under section 14A, as there is no exempt income earned by assessee. This ground raised by assessee stands allowed. Disallowance of interest u/s 36 (1) (iii) - HELD THAT - As AR tried to make a point on disallowance by submitting that loan advanced by assessee to Vectra Advanced Engineering Pvt.Ltd was due to prior commitments, being a group concern. Further there is no dispute regarding loan having not been advanced by assessee. Revenue is aggrieved with the fact that, assessee borrowed loan at 14% and advanced to Vectra Advanced Engineering Pvt.Ltd at 9% and thereby holding loan transaction, not at market price. One has to look into the transaction in an holistic way taking into consideration Commercial expediency. It is an agreed position that assessing officer cannot dictate a businessman how to conduct its business. However it also cannot be denied that the interest at which assessee has extended borrowed funds to its group concern is much low than SBI rate. Restricting the disallowance to 2% being difference between the rate at which assessee borrowed funds and 12% being SBI rate during relevant period. Accordingly this ground raised by assessee stands partly allowed

Issues Involved:
1. Disallowance of depreciation on plant and machinery.
2. Disallowance of security deposit written off.
3. Disallowance under section 14A of the Income-tax Act.
4. Addition to book profits under section 115JB(2).
5. Disallowance of interest paid on borrowings.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation on Plant and Machinery:
The primary contention revolves around the disallowance of depreciation claimed by the assessee on plant and machinery given on lease. The assessee argued that the plant and machinery were part of the block of assets and were used in the business, even though no lease rent was generated during the relevant assessment years. The assessee cited various judicial precedents, including the Supreme Court's decision in ICDS Ltd vs CIT and the Karnataka High Court's decision in Manipal Finance Corporation Ltd vs ACIT, to support the claim that the assets were used for business purposes and thus eligible for depreciation.

The Revenue countered that the assessee did not earn any income from these assets, failing one of the twin conditions for claiming depreciation. The Tribunal agreed with the Revenue, noting the lack of evidence to substantiate the existence and usage of the plant and machinery. No lease or hire purchase agreements were provided to support the claim. Consequently, the ground of appeal regarding the disallowance of depreciation was dismissed for all assessment years under consideration (AY 2010-11, AY 2011-12, and AY 2012-13).

2. Disallowance of Security Deposit Written Off:
This issue pertains to the disallowance of a security deposit written off, amounting to ?14,68,800, under section 37(1) of the Act. The assessee claimed it as a business expense, while the Revenue treated it as a capital loss. However, this specific ground was not elaborated upon in the judgment provided, and thus the outcome remains unclear from the provided text.

3. Disallowance under Section 14A:
For AY 2011-12, the assessee challenged the disallowance under section 14A read with Rule 8D, arguing no exempt income was earned during the relevant assessment year. The Tribunal referred to the Delhi Special Bench decision in ACIT vs Vireet Investments Pvt. Ltd., which held that no disallowance under section 14A should be made if no exempt income is earned. Accordingly, the Tribunal directed the AO to delete the disallowance for AY 2011-12.

4. Addition to Book Profits under Section 115JB(2):
The assessee disputed the addition of ?23,84,651 to the book profits under clause (f) of Explanation 1 to Section 115JB(2), which was based on the suo-moto disallowance under section 14A. The Tribunal, aligning with its decision on the disallowance under section 14A, directed the AO to reconsider the addition to book profits, as no exempt income was earned during the year. This ground was allowed for AY 2011-12.

5. Disallowance of Interest Paid on Borrowings:
For AY 2012-13, the issue involved the disallowance of ?1,52,76,998 as interest paid on borrowings. The AO disallowed the interest, arguing that the loan was advanced to a group concern at a lower interest rate, indicating a diversion of funds. The Tribunal acknowledged the commercial expediency of the transaction but noted that the interest rate charged was below the State Bank of India's rate. Thus, the Tribunal restricted the disallowance to 2%, representing the difference between the borrowing rate and the SBI rate during the relevant period. This ground was partly allowed.

Conclusion:
- The appeals regarding the disallowance of depreciation on plant and machinery were dismissed for AY 2010-11, AY 2011-12, and AY 2012-13.
- The disallowance under section 14A was deleted, and the addition to book profits under section 115JB(2) was reconsidered for AY 2011-12.
- The disallowance of interest paid on borrowings was partly allowed for AY 2012-13, with a restriction to 2% disallowance of the interest rate difference.

The judgment was pronounced in the open court on 31-07-2019.

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