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Issues: (i) Whether, on the facts, disallowance of interest expenditure under section 14A read with Rule 8D(2)(i) was sustainable; (ii) whether section 50C could be invoked to recompute the written down value of the depreciable block of assets for allowing depreciation; (iii) whether the interest allocation under Rule 8D(2)(ii) had to be computed with reference to the interest cost for the full year.
Issue (i): Whether, on the facts, disallowance of interest expenditure under section 14A read with Rule 8D(2)(i) was sustainable.
Analysis: The seasonal nature of the business showed periods of reduced activity, but the Revenue did not establish a direct nexus between the released business funds and investment in tax-exempt instruments. The mere availability of surplus funds during lean months was held insufficient, in the absence of proof that such funds were actually diverted to exempt investments.
Conclusion: The deletion of the disallowance under section 14A read with Rule 8D(2)(i) was upheld, against the Revenue.
Issue (ii): Whether section 50C could be invoked to recompute the written down value of the depreciable block of assets for allowing depreciation.
Analysis: Section 50C was held to be a deeming provision confined to computation of capital gains under sections 45 and 48 and had no bearing on the determination of written down value under section 43(6). The alternate stamp-duty valuation could not be used to alter the opening written down value of the block of assets.
Conclusion: The Revenue's challenge on depreciation failed, and the allowance of depreciation as computed without applying section 50C was sustained, against the Revenue.
Issue (iii): Whether the interest allocation under Rule 8D(2)(ii) had to be computed with reference to the interest cost for the full year.
Analysis: Once no part of the total interest expenditure was treated as direct expenditure under Rule 8D(2)(i), the balance interest for indirect allocation had to be determined with reference to the entire yearly interest cost. The adjustment was treated as an inter-clause reallocation under Rule 8D, not as enhancement.
Conclusion: The interest disallowance under Rule 8D(2)(ii) was directed to be recomputed on the basis of the full-year interest cost, in favour of the Revenue.
Final Conclusion: The assessee's appeal was not pressed, the Revenue largely failed on the depreciation issue, but succeeded to the limited extent of securing a higher interest allocation under Rule 8D(2)(ii); the Revenue's appeal was otherwise dismissed.
Ratio Decidendi: Section 50C applies only for computing capital gains and cannot be used to alter the written down value of a depreciable block, while disallowance under section 14A requires proof of nexus between exempt investments and the funds claimed to have been diverted.
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