2015 (8) TMI 844 - AT - Income Tax

Tribunal Upholds Decision on Capital Subsidy & Interest Expenses, Dismissing Revenue's Appeals

The Tribunal upheld the CIT(A)'s decision, confirming that the capital subsidy should not be reduced from the cost of assets for depreciation purposes, ... Disallowance of depreciation by applying Explanation 10 to section 43(1) - CIT(A) deleted disallowance - Held that:- Capital subsidy scheme is exactly identical as was in AY 2007-08 in assessee’s own case considering that in AY 2003-04 & 2004-05, no such partial disallowance of depreciation was made by reduction of subsidy from actual cost/w.d.v of fixed assets along with the act that in last year, such partial disallowance of depreciation was deleted by my predecessor in office and also considering the judgments cited by the appellant, the action of the AO in reducing the subsidy from the cost/w.d.v of assets for allowing depreciation u/s. 32 is held to be not tenable and addition made on this account is deleted and Hon’ble High court has not admitted the question referred to by revenue u/s. 260A of the Act regarding depreciation on capital subsidy. Once Hon’ble High Court has declined to admit the question, order of Tribunal has become final. Accordingly, this issue is covered in favour of the assessee and against the revenue. Hence, we confirm the finding of CIT(A) and this issue of revenue is dismissed. - Decided in favour of assessee. Disallowance of expenses qua interest against exempt income by invoking the provision of section 14A - CIT(A) deleted disallowance - Held that:- Now the revenue could not establish that the investments made in shares giving exempted income is out of borrowed funds on which interest is paid by assessee. There is no nexus whatsoever. On specific query Ld. Sr. DR could not controvert that the assessee has made in investment in shares giving exempt income out of own funds which is at about 2429 lacs and investment is at ₹ 365 lacs only. Once this fact has not been denied and CIT(A) has categorically observed that the assessee has made investment in shares out of its own funds no disallowance can be attributed qua the interest paid on borrowed funds for investing the same in interest free funds. In view of the above, we confirm the order of CIT(A) on this common issue. - Decided against revenue. Issues Involved:1. Disallowance of depreciation by applying the provisions of Explanation 10 to Section 43(1) of the Income-tax Act, 1961.2. Disallowance of expenses related to exempt income by invoking Section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules.Issue 1: Disallowance of DepreciationFacts:The assessee received a capital subsidy of Rs. 5,04,92,043/- from the Government of West Bengal by remission of sales tax, which was claimed for the promotion of industries by setting up new industries. The assessee included this subsidy while claiming depreciation on assets. The Assessing Officer (AO) disallowed Rs. 62,94,085/- by reducing the subsidy from the cost of assets, thereby disallowing depreciation on the subsidized amount.CIT(A) Decision:The CIT(A) allowed the assessee's claim, noting that in previous years, the subsidy was accepted as a capital receipt without reducing it from the cost of assets for depreciation purposes. The CIT(A) observed that the subsidy was given to encourage industrial resurgence and was not intended to meet the cost of any asset directly or indirectly. The CIT(A) referenced the West Bengal Incentive Scheme, 1999, which did not indicate that the subsidy was meant to cover the cost of assets.Tribunal's Analysis:The Tribunal noted that in the assessee's own case for AY 2007-08, the Tribunal had allowed the claim, and this decision was confirmed by the Hon'ble Calcutta High Court. The High Court did not admit the question regarding depreciation on capital subsidy, indicating the issue was settled in favor of the assessee. As the capital subsidy scheme was identical to that of AY 2007-08, the Tribunal confirmed the CIT(A)'s findings and dismissed the revenue's appeal on this issue.Conclusion:The Tribunal upheld the CIT(A)'s decision, confirming that the capital subsidy should not be reduced from the cost of assets for depreciation purposes, dismissing the revenue's appeal.Issue 2: Disallowance of Expenses Related to Exempt IncomeFacts:The AO disallowed interest expenses of Rs. 5,85,519/- related to investments generating exempt income by invoking Section 14A read with Rule 8D. The AO calculated the disallowance based on the average investment and average assets.CIT(A) Decision:The CIT(A) deleted the disallowance, finding no direct nexus between borrowed funds and investments in shares generating exempt income. The CIT(A) noted that the assessee had sufficient own funds to cover the investments and that the borrowings were primarily for operational activities, not for investments in shares.Tribunal's Analysis:The Tribunal agreed with the CIT(A), noting that the revenue could not establish a direct nexus between borrowed funds and investments in shares. The Tribunal confirmed that the assessee's own funds were sufficient to cover the investments, and therefore, no disallowance of interest expenses was warranted.Conclusion:The Tribunal upheld the CIT(A)'s decision, confirming the deletion of disallowance of interest expenses related to exempt income, dismissing the revenue's appeal on this issue.Final Judgment:Both appeals by the revenue were dismissed. The Tribunal confirmed the CIT(A)'s findings on both issues, ruling in favor of the assessee.