2021 (4) TMI 1152 - AT - Income Tax

Disallowance u/s 14A - AO noticed that assessee has made huge investments in shares and securities, but did not make suo moto disallowance of any expenses relatable to exempt income and hence, invoked Rule 8D of Income Tax Rules, 1962 and computed disallowance - CIT-A deleted additions made towards disallowance u/s.14A by holding that when there is no exempt income earned for the relevant assessment year, then there cannot be any disallowance relatable to such exempt income - HELD THAT - The issue of disallowance of expenses relatable to exempt income u/s.14A, in a situation where there is no exempt income earned for the relevant assessment year has been subject matter of deliberations by various High Courts, including the case of M/s. Redington India Ltd. 2017 (1) TMI 318 - MADRAS HIGH COURT in the light of the provisions of section 14A of the Act, where it was clearly held that provisions of section 14A r.w.r 8D cannot be made applicable in a vacuum i.e., in the absence of exempt income. The Hon'ble Supreme Court in the case of CIT vs. Chettinad Logistics Pvt.Ltd. 2018 (7) TMI 567 - SC ORDER has upheld the findings of the Hon ble Madras High Court that section 14A cannot be invoked, where no exempt income was earned by the assessee in the relevant assessment year. In this case, the learned CIT(A) has recorded categorical finding that the assessee has not earned any exempt income for the relevant assessment year. Therefore, we are of the considered view that findings recorded by the learned CIT(A) in light of the decision of Hon ble Jurisdictional Madras High Court in the case of M/s. Redington India Ltd. Vs.Addl.CIT (supra) is in accordance with law and does not call for any interference. - Decided in favour of assessee. Disallowance of depreciation of plant and machinery - AO disallowed depreciation claimed on plant and machinery on the ground that although plant and machinery was installed and commissioned before 30.03.2013, but the same has not been put to use in the business of the assessee - HELD THAT - In this case, on perusal of various details filed by the assessee including commissioning report of plant and machinery, we find that all plant and machinery were acquired and installed before the end of the financial year. In fact, the assessee has placed on record production details of finished goods from newly installed plant and machinery. Assessing Officer has erred in disallowing depreciation on plant and machinery on assumption and surmises that in one day so much units of finished goods cannot be produced without understanding fact that in one day so many lakhs of units can be produced depending upon installed capacity of the plant and machinery. In this case, the observations of the Assessing Officer that so much units cannot be produced in one day was nothing but assumption or surmises, but not based on any facts and figures. Therefore, we are of the considered view that on this ground depreciation claimed on plant and machinery which were installed and put to use in the business of the assessee cannot be denied. Be that as it may, even assuming for a moment, the asset was not put to use in the business of the assessee, but when the plant and machinery is installed and ready for use in the business for the relevant assessment year, then claim of depreciation can be allowed. There is no error in the findings recorded by the learned CIT(A) to delete disallowance of depreciation on plant and machinery. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 14A of the Income Tax Act, 1961 in the absence of exempt income.
2. Disallowance of depreciation on plant and machinery not put to use during the relevant assessment year.
3. Condonation of delay in filing cross objection by the assessee.

Detailed Analysis:

1. Applicability of Section 14A of the Income Tax Act, 1961 in the absence of exempt income:
The Revenue challenged the CIT(A)'s decision to not apply Section 14A, arguing that the assessee held exempt income-bearing investments and thus Rule 8D should be triggered regardless of actual exempt income earned. The CIT(A) had relied on the Madras High Court's decision in M/s. Redington India Ltd., which pertained to a pre-Rule 8D period, to conclude that no disallowance under Section 14A was warranted without exempt income. The Revenue cited CBDT Circular No. 5/2014, asserting that Section 14A applies even without exempt income. However, the Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT vs. Chettinad Logistics Pvt. Ltd., affirming that Section 14A cannot be invoked without exempt income. Thus, the Tribunal rejected the Revenue's appeal on this issue.

2. Disallowance of depreciation on plant and machinery not put to use during the relevant assessment year:
The Revenue contested the CIT(A)'s deletion of depreciation disallowance, arguing the assessee did not establish the actual use of plant and machinery within the relevant year. The Assessing Officer had disallowed depreciation based on the improbability of producing significant volumes of finished goods in one day. The CIT(A) referenced the Madras High Court's decision in CIT vs. Chennai Petroleum Corporation and the Bombay High Court's ruling in Whittle Anderson Ltd. vs. CIT, which support depreciation on machinery ready for use, even if not actively used. The Tribunal found the assessee provided sufficient evidence of installation and commissioning before 30.03.2013, including production details. The Tribunal concluded the Assessing Officer's disallowance was based on assumptions and upheld the CIT(A)'s decision to allow depreciation, dismissing the Revenue's appeal on this ground.

3. Condonation of delay in filing cross objection by the assessee:
The assessee sought condonation for a 66-day delay in filing a cross objection, attributing it to the Authorized Representative being out of town. The Tribunal, considering the reasons provided as reasonable cause, condoned the delay and admitted the cross objection. However, since the Revenue's appeal was dismissed on all issues, the cross objection became infructuous and was dismissed as not maintainable.

Conclusion:
The Tribunal dismissed the Revenue's appeal on both the applicability of Section 14A in the absence of exempt income and the disallowance of depreciation on plant and machinery. Consequently, the assessee's cross objection was also dismissed as not maintainable. The order was pronounced on 21st April 2021.