Tribunal partially allows appeal under Income Tax Act, directing investment allowance but upholding depreciation restrictions.

The Tribunal partly allowed the appeal, deleting the disallowance under section 35AD(5)(aa) of the Income Tax Act and directing the Assessing Officer to allow the investment allowance claimed by the assessee. However, the Tribunal upheld the restriction on higher depreciation for plant and machinery and building, confirming the CIT(A)'s decision.

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Issues Involved:
1. Disallowance of the claim of deduction under section 35AD(5)(aa) of the Income Tax Act, 1961.
2. Restriction of higher depreciation on plant & machinery as well as building.

Issue-wise Detailed Analysis:

1. Disallowance of the Claim of Deduction under Section 35AD(5)(aa):

The assessee, engaged in civil construction and hospitality, filed a return of income for the assessment year 2011-12, claiming a loss and book profit. The return was processed, and a demand was determined. During scrutiny, it was found that the assessee had capitalized expenses for a hotel (The Rain Tree) and claimed a deduction under section 35AD(5)(aa) of the Income Tax Act, 1961. The assessee's claim was based on the hotel being classified as a 'Three' star category from 10.05.2011. However, the classification was not granted for the financial year 2010-11, which was a prerequisite for the deduction. Consequently, the Assessing Officer disallowed the investment allowance claimed.

The assessee argued that the star classification obtained in the next assessment year should relate back to the date of application and commencement of operations. They contended that the delay in obtaining the classification was procedural and not attributable to them. The assessee maintained that the legislative intent of section 35AD was to provide investment-linked incentives, and since the hotel was operational and income was offered to tax, the deduction should be allowed.

The Tribunal observed that the Department had accepted the income from the hotel business, which was operational in the financial year 2010-11. The delay in obtaining the star classification was procedural, and the assessee should not be penalized for it. The Tribunal concluded that the disallowance made under section 35AD(5)(aa) was not justified and directed the Assessing Officer to allow the investment allowance as claimed by the assessee.

2. Restriction of Higher Depreciation on Plant & Machinery and Building:

The assessee did not claim depreciation on the assets capitalized for the new hotel, as they had claimed investment allowance under section 35AD. Since the investment allowance was disallowed, the Assessing Officer allowed depreciation at 15% on the building and 10% on plant and machinery. The assessee appealed for higher depreciation, but the CIT(A) dismissed the appeal, stating there was no material to suggest eligibility for higher depreciation.

The Tribunal upheld the CIT(A)'s decision, noting that the eligible rate of depreciation for buildings used for hotels, as per the Income Tax Rules, is 10%. The Tribunal found no reason to interfere with the order passed by the CIT(A) on this issue and dismissed the ground raised by the assessee.

Conclusion:

The appeal filed by the assessee was partly allowed. The Tribunal deleted the disallowance made under section 35AD(5)(aa) and directed the Assessing Officer to allow the investment allowance. However, the Tribunal upheld the restriction of higher depreciation on plant and machinery and building, confirming the CIT(A)'s order.

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