Own funds, capital receipt, and non-linked subsidy defeated tax additions in depreciation and disallowance disputes.

The computation of income figure, not the mistaken figure in the return, was correctly adopted as the returned income. Section 14A read with Rule 8D disallowance was deleted because the mutual fund investments were made from substantial own funds and accumulated profits, with no proven nexus to borrowed funds. The surplus arising on prepayment of deferred sales tax liability at net present value was held to be a capital receipt, not taxable under section 41(1), as there was no remission or cessation of liability. Special capital incentive subsidy was not required to be reduced from the written down value, since it was not granted to meet any specific part of the asset cost.

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Issues: (i) whether the returned income was to be taken as per the computation of income rather than the figure shown in the return of income; (ii) whether disallowance under section 14A read with Rule 8D was warranted in respect of investment made from own funds; (iii) whether the surplus arising on prepayment of deferred sales tax liability at net present value was a capital receipt and not taxable as income; and (iv) whether special capital incentive subsidy was required to be reduced from the written down value of assets while computing depreciation.

Issue (i): whether the returned income was to be taken as per the computation of income rather than the figure shown in the return of income.

Analysis: The discrepancy arose because the assessing authority adopted the higher figure shown in the return instead of the lower figure reflected in the computation of income. The appellate authority recorded a factual finding that the return figure had been incorrectly taken and that the computation figure represented the correct returned income on the record.

Conclusion: The figure of income as per the computation was correctly directed to be adopted and the relief stands in favour of the assessee.

Issue (ii): whether disallowance under section 14A read with Rule 8D was warranted in respect of investment made from own funds.

Analysis: The investment in mutual funds was found to have been made out of substantial interest-free funds and accumulated profits, with no established nexus between borrowed funds and the investment. In the absence of material brought by the revenue to rebut the assessee's explanation, a proportionate interest disallowance was not justified.

Conclusion: The disallowance under section 14A read with Rule 8D was rightly deleted and the issue is decided in favour of the assessee.

Issue (iii): whether the surplus arising on prepayment of deferred sales tax liability at net present value was a capital receipt and not taxable as income.

Analysis: The deferred sales tax liability was converted into a prepayment at net present value under the State incentive scheme and the difference between the original liability and the discounted payment did not represent remission or cessation of liability. The amount was treated as part of the capital field and not as a revenue receipt chargeable to tax under section 41(1).

Conclusion: The surplus was correctly held to be a capital receipt and not taxable as income, in favour of the assessee.

Issue (iv): whether special capital incentive subsidy was required to be reduced from the written down value of assets while computing depreciation.

Analysis: The subsidy was not found to be granted for meeting any specific portion of the cost of the assets. As the incentive was not directly linked to acquisition cost, it could not be deducted from the written down value for depreciation purposes.

Conclusion: The reduction from the written down value was not justified and the deletion of the depreciation adjustment is upheld in favour of the assessee.

Final Conclusion: The appellate order granting relief on all contested additions is sustained and the revenue's challenge fails.

Ratio Decidendi: Where the revenue fails to establish a nexus between borrowed funds and tax-free investments, section 14A disallowance cannot be sustained; a deferral-scheme differential is not taxable if it represents a capital adjustment without remission or cessation of liability; and a subsidy not intended to meet the cost of an asset cannot be deducted from its written down value.

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