2015 (6) TMI 517 - AT - Income Tax

Assessee's appeals granted on depreciation & interest expenses, but contributions disallowed. Revenue's appeals dismissed.

The Tribunal partly allowed the assessee's appeals, granting relief on the disallowance of depreciation and interest expenses under Section 14A. However, ... Explanation 10 to section 43(1) - depreciation on actual cost / written down value - deduction under section 35 for scientific research contributions - residuary deduction under section 37 - section 14A - expenditure in relation to income not forming part of total income - Rule 8D - apportionment methodology - section 194C - TDS on contract/transportation chargesExplanation 10 to section 43(1) - depreciation on actual cost / written down value - Whether the grant portion of cost of plant and machinery received under the NDDB '70% loan and 30% grant' scheme is required to be excluded from actual cost for computation of depreciation for assessment years from 1999-2000 onwards. - HELD THAT: - The Tribunal examined the scope and temporal operation of Explanation 10 to section 43(1) and the conflicting authorities. It noted earlier decisions allowing depreciation on full cost for assets/grants before insertion of Explanation 10 but found that the Explanation itself makes no reference to acquisition or disbursement dates and therefore applies from AY 1999-2000 onwards irrespective of the year of acquisition or receipt. However, having considered the decisions of the Hon'ble Gujarat High Court in Mahesana District Co-op. Milk Producers' Union Ltd. and the Hon'ble Kerala High Court in CIT v. Sun Fibre Optics (P.) Ltd., and on balance of precedents relied upon by the assessee, the Tribunal held that the authorities below were not justified in excluding the grant portion in the present facts and deleted the disallowance, directing the Assessing Officer to allow depreciation on the entire cost as claimed by the assessee for the years before it.Disallowance of depreciation by excluding the grant portion is deleted; depreciation allowed on the entire cost for the stated assessment years.Deduction under section 35 for scientific research contributions - residuary deduction under section 37 - Whether contribution to Amul Research & Development Association (ARDA) is allowable as a business expenditure under section 37 or must be considered under section 35 and hence disallowed when conditions of section 35 are not satisfied. - HELD THAT: - The Tribunal accepted that the payments were made to an entity engaged in research. It reiterated that section 37 is residuary and that expenditure falling within sections 30 to 36 (including section 35 dealing with scientific research) cannot be claimed under section 37. Deduction under section 35(1)(ii) is subject to prescribed approval and notification conditions; no material was produced to show ARDA satisfied those conditions and parts of the contributions were applied to capital assets. Consequently the CIT(A)'s view that the payments fall within section 35 and, absent compliance with its conditions, are not allowable under section 37 was upheld.Disallowance of the contribution to ARDA upheld; claim under section 37 rejected.Treatment of appropriation from general reserves - revenue deduction for staff welfare - Whether amounts paid from the assessee's general reserve to an educational society for employees' children are deductible as current business expenditure in the relevant assessment year. - HELD THAT: - The Tribunal recorded the factual finding that the amount was paid out of general reserve (an appropriation of profits) and was not debited to the profit and loss account for the year. Appropriations from accumulated profits are not current year business expenses and therefore are not deductible as revenue expenditure in the assessment year. The assessee did not controvert this factual finding with contrary material.Disallowance confirmed; contribution from general reserve not deductible as current year expenditure.Section 14A - expenditure in relation to income not forming part of total income - Rule 8D - apportionment methodology - Whether disallowance under section 14A in respect of expenditure related to dividend income (excluded from total income by virtue of section 80P(2)(d)) is sustainable for AY 2007-08 and the appropriate method for determining the disallowance where Rule 8D is not applicable. - HELD THAT: - Having considered competing authorities, including the Gujarat High Court decision in CIT v. Banaskantha Dist. Co-op. Milk Producers' Union Ltd. and the reasoning of higher courts, the Tribunal held that section 14A applies to income that does not form part of total income and that deduction under Chapter VIA does not convert such income into one outside the scope of section 14A. Although Rule 8D was not effective for the year under consideration, judicial guidance requires the AO to determine expenditure reasonably; the Tribunal followed precedent directing application of a reasonable apportionment (on lines consistent with Rule 8D) and found the AO's computation of the disallowance reasonable on the facts of the case, but in the present appeals the Tribunal directed deletion of the disallowance following the jurisdictional High Court precedent favouring the assessee.Disallowance under section 14A deleted and the AO directed to remove the addition for the year in question.Section 194C - TDS on contract/transportation charges - Whether the Assessing Officer was correct in invoking section 40(a)(ia) for failure to deduct tax at source under section 194C on transportation charges charged separately by the contractor, in appeals for AYs 2005-06 and 2006-07. - HELD THAT: - The Tribunal noted that the CIT(A) followed the Coordinate Bench decision in Krishak Bharati Co-operative Ltd. which addressed the contractual separation of sale and transportation and the applicability of section 194C. The Revenue did not place any conflicting binding precedent to displace that view. On the facts and in view of the coordinate decision followed by the CIT(A), the Tribunal found no infirmity in the appellate order cancelling the disallowance under section 40(a)(ia).Orders of the CIT(A) cancelling the disallowance under section 40(a)(ia) are upheld; Revenue appeals dismissed for those years.Final Conclusion: All five appeals of the assessee are partly allowed (deletion of grant-related depreciation disallowances for the stated years; other additions either upheld or rejected as detailed), and both revenue appeals under section 40(a)(ia) are dismissed. Issues Involved:1. Disallowance of depreciation on plant and machinery received as a grant/subsidy from NDDB.2. Disallowance of contribution to ARDA as business expenditure.3. Disallowance of contribution to Anandalaya Education Society.4. Disallowance of interest expense under Section 14A.5. Disallowance under Section 40(a)(ia) for non-deduction of TDS on transportation charges.Issue-wise Detailed Analysis:1. Disallowance of Depreciation on Plant and Machinery Received as Grant/Subsidy from NDDB:The assessee argued that the 30% grant received from NDDB should not be deducted from the cost of assets for depreciation purposes. The CIT(A) upheld the disallowance based on Explanation 10 to Section 43(1) of the Act, which mandates that the cost of an asset should exclude any portion met by a grant. The Tribunal considered the judgments of the Hon'ble Gujarat High Court in the case of Mahesana District Co-operative Milk Producers Union Ltd. and the Hon'ble Kerala High Court in CIT vs. Sun Fibre Optics (P.) Ltd., which held that the amendment is prospective and applies only to assets acquired after 01/04/1999. The Tribunal concluded that the authorities were not justified in excluding the grant portion from the actual cost and allowed the assessee's appeal on this ground.2. Disallowance of Contribution to ARDA as Business Expenditure:The assessee claimed a deduction for contributions to ARDA under Section 37 of the Act, arguing it was for business purposes. The CIT(A) disallowed the claim, stating that the expense falls under Section 35(1)(ii) and cannot be claimed under Section 37. The Tribunal upheld the CIT(A)'s decision, noting that the contributions were partly used for building capital assets and ARDA was not approved as required under Section 35(1)(ii). Therefore, the deduction was not permissible under either Section 35 or Section 37.3. Disallowance of Contribution to Anandalaya Education Society:The assessee claimed a deduction for contributions to Anandalaya Education Society for employees' children's education fees. The CIT(A) disallowed the claim, stating that the contribution was made from the general reserve fund and was an appropriation of profits, not a current year expense. The Tribunal upheld this decision, noting that the finding was not contested with any contrary material by the assessee.4. Disallowance of Interest Expense under Section 14A:The assessee contested the disallowance of interest expenses related to dividend income deductible under Section 80P(2)(d). The CIT(A) applied Section 14A, stating that the dividend income did not form part of the total income due to the deduction under Chapter VI-A. The Tribunal referred to the Hon'ble Gujarat High Court's judgment in CIT vs. Banaskantha Dist. Co-op. Milk Producers' Union Ltd., which held that Section 14A does not apply to deductions under Chapter VI-A. Consequently, the Tribunal directed the AO to delete the disallowance.5. Disallowance under Section 40(a)(ia) for Non-deduction of TDS on Transportation Charges:The AO disallowed expenses for non-deduction of TDS on transportation charges under Section 194C. The CIT(A) deleted the disallowance, following the ITAT's decision in M/s. Krishak Bharati Co-operative Ltd. The Tribunal upheld the CIT(A)'s order, noting no contrary decision was presented by the Revenue.Conclusion:The Tribunal partly allowed the assessee's appeals for the respective assessment years, granting relief on the disallowance of depreciation and interest expenses under Section 14A while upholding the disallowance of contributions to ARDA and Anandalaya Education Society. The Revenue's appeals were dismissed.