2016 (2) TMI 1278 - AT - Income Tax

Tribunal Partially Allows Depreciation Claims; Upholds Disallowances on Windmills, UPS, Stresses Adherence to Law.

The Tribunal adjudicated multiple disallowance issues raised by the assessee, providing relief in some instances while upholding the AO's decisions in ... Additional depreciation under section 32(1)(iia) - carry forward of unclaimed depreciation - scope of additional depreciation for assets eligible for 100% deduction - allowability of additional depreciation on leased assets - rate of depreciation for buildings used mainly for residential purposes - disallowance under section 14A read with Rule 8D - non-dedibility of wealth-tax under section 40(iia) - transfer pricing - admissibility of revised Form 3CEB and remand for fresh consideration under section 92CA(3) - treatment of statutory liabilities and deduction under section 43B on slump sale - classification of UPS for depreciation purposes - treatment of Securities Transaction Tax in computation of capital gains - allowance of TDS credit upon verificationAdditional depreciation under section 32(1)(iia) - carry forward of unclaimed depreciation - Claim for additional depreciation in respect of assets put to use in the second half of the previous year and carry forward of the balance was allowable. - HELD THAT: - The Tribunal examined the provisions of section 32(1)(iia) and the assessee's submission that only 50% depreciation was allowed in the earlier year because assets were put to use for less than 180 days and that the balance should be claimable in the subsequent year. Having considered the decisions relied on by the assessee and the nature of the assets, the Tribunal held that the assessee was entitled to the additional depreciation claimed and, respectfully following relevant Tribunal authorities, directed the Assessing Officer to allow the claim. [Paras 4]Appeal allowed on this ground; Assessing Officer to allow additional depreciation claimed.Scope of additional depreciation for assets eligible for 100% deduction - Additional depreciation cannot be claimed on assets that are eligible for 100% depreciation under the Rules when the entire cost is allowable as deduction. - HELD THAT: - The Tribunal considered the assessee's contention that assets eligible for 100% depreciation (used for less than 180 days) should also attract additional depreciation. On interpretation of section 32(1)(iia) and the legislative scheme, the Tribunal found the provision does not permit additional depreciation in respect of assets already entitled to 100% deduction and upheld the Assessing Officer's and DRP's disallowance. [Paras 5]Appeal dismissed on this ground; disallowance upheld.Allowability of additional depreciation on leased assets - definition of business of manufacture or production - Additional depreciation disallowed on windmills acquired and leased out, as the assessee was not using those assets in its own manufacture or production business. - HELD THAT: - Section 32(1)(iia) grants additional depreciation to assets put to use by an assessee in the business of manufacture or production (or generation/distribution of power). The assessee purchased windmills and leased them out; it was not engaged in manufacture of windmills. The Tribunal found the cited authorities on leasing were distinguishable and that the statutory wording did not support allowance of additional depreciation for leased windmills in the assessee's circumstances. The Assessing Officer's disallowance was therefore sustained. [Paras 6]Appeal dismissed on this ground; disallowance upheld in favour of Revenue.Rate of depreciation for buildings used mainly for residential purposes - Depreciation on buildings used mainly for residential purposes is restricted to the rate prescribed in the Income Tax Rules (5%), and excess claimed at 10% was disallowed. - HELD THAT: - The Tribunal applied the Income Tax Rules which prescribe a 5% depreciation rate for buildings used mainly for residential purposes (except hotels and boarding houses). The assessee's reliance on earlier favourable orders in other years did not justify deviation from the statutory rate. The Assessing Officer's adjustment was therefore upheld. [Paras 7]Appeal dismissed on this ground; excess depreciation disallowed.Disallowance under section 14A read with Rule 8D - For assessment year 2006-07, disallowance under section 14A was to be computed at 2% of exempt income; Rule 8D (introduced later) could not be applied retrospectively. - HELD THAT: - The Tribunal noted Rule 8D was introduced with effect from 24.03.2008 and is applicable from AY 2008-09; it cannot be applied to AY 2006-07. Relying on the jurisdictional High Court authority, the Tribunal directed that disallowance under section 14A for the year in issue be computed at 2% of exempt income, rejecting the Assessing Officer's application of Rule 8D to the earlier year. [Paras 8]Ground partly allowed; Assessing Officer directed to disallow 2% of exempt income under section 14A.Non-dedibility of wealth-tax under section 40(iia) - Wealth-tax paid is not deductible under the Act and the Assessing Officer's disallowance was confirmed. - HELD THAT: - The Tribunal applied section 40(iia) which precludes deduction of any sum paid on account of wealth-tax. The assessee's contention that wealth-tax on business assets should be allowed was not accepted as the statutory provision is explicit. The Assessing Officer's disallowance was therefore affirmed. [Paras 9]Appeal dismissed on this ground; disallowance confirmed.Transfer pricing - admissibility of revised Form 3CEB - remand for fresh consideration under section 92CA(3) - TPO's rejection of the assessee's revised Form 3CEB was improper; the matter is remitted to the Assessing Officer to consider the revised Form 3CEB, allow hearing and recompute ALP. - HELD THAT: - The Tribunal observed that the revised Form 3CEB containing corrected and more appropriate comparables was filed well before the TPO's order. As section 92CA(3) does not specify a time limit for considering additional materials and since the revised report contained factual comparables certified by the Chartered Accountant, the TPO should not have ignored it on limitation grounds. In the interest of justice, the Tribunal set aside the impugned order and remitted the issue to the Assessing Officer to consider the revised Form 3CEB, afford opportunity of hearing and pass a fresh order on ALP. [Paras 10]Ground partly allowed for statistical purpose; matter remitted to Assessing Officer to consider revised Form 3CEB and recompute ALP with opportunity to assessee.Treatment of statutory liabilities and deduction under section 43B on slump sale - Claim for deduction under section 43B in respect of statutory liabilities alleged to be discharged by set-off in a slump sale is remitted to the Assessing Officer for verification of actual payment. - HELD THAT: - The Tribunal noted that on slump sale liabilities may be netted against consideration but the assessee produced no evidence of actual payment to the concerned authorities. The Assessing Officer was directed to verify whether statutory payments were in fact discharged (production of challans/proof) and if so to allow the deduction under section 43B; absent proof, disallowance stands. [Paras 11]Ground partly allowed for statistical purpose; remitted to Assessing Officer to verify discharge of statutory payments and allow deduction if payment is proved.Classification of UPS for depreciation purposes - UPS is not an integral part of a computer nor an energy-saving device qualifying for higher rates; it is a separate plant and machinery and depreciation at 25% is appropriate. - HELD THAT: - The Tribunal followed coordinate bench authority which held that UPS has an independent character supporting systems and is not part of the computer block or an energy-saving device attracting higher rates. Accordingly, the higher claim was not sustainable and depreciation was allowed at the 25% rate. [Paras 12]Appeal partly allowed; depreciation on UPS allowed at 25%.Treatment of Securities Transaction Tax in computation of capital gains - Assessing Officer to verify computation and delete the addition in respect of Securities Transaction Tax where STT was part of contract notes and sale consideration and income was offered under capital gains. - HELD THAT: - The Tribunal observed that where STT is automatically included in exchange contract notes and the assessee has computed capital gains after adjusting for STT (without claiming it as a business expenditure), the AO must verify the computation before making an addition. The Tribunal directed the Assessing Officer to verify accounts and delete the addition if computation supports the assessee's position. [Paras 13]Appeal allowed on this ground subject to verification; AO directed to verify computation and delete the addition if warranted.Allowance of TDS credit upon verification - TDS credit shown in Form 16A was to be allowed after verification of the TDS deducted by the deductor. - HELD THAT: - The Tribunal directed the Assessing Officer to verify the TDS records and allow the credit as per Form 16A in accordance with law, thereby correcting the Assessing Officer's omission. [Paras 15]Appeal allowed on this ground; Assessing Officer directed to allow TDS credit after verification.Final Conclusion: The appeal is partly allowed for statistical purposes: certain claims of additional depreciation and other adjustments were allowed or partly allowed (including carry forward additional depreciation, 2% disallowance under section 14A for AY 2006-07, depreciation on UPS at 25%, STT and TDS credit subject to verification), other disallowances were upheld (including additional depreciation on 100% deduction assets, leased windmills, wealth-tax), and matters requiring factual re-examination (transfer pricing revised Form 3CEB and section 43B slump-sale liability discharge) were remitted to the Assessing Officer for fresh consideration with opportunity to the assessee. Issues Involved:1. Disallowance of additional depreciation claimed under Section 32(1)(iia) of the Income Tax Act.2. Disallowance of additional depreciation on assets eligible for 100% deduction.3. Disallowance of additional depreciation on leased assets (windmills).4. Disallowance of depreciation on residential building.5. Disallowance under Section 14A read with Rule 8D of the Income Tax Act.6. Disallowance of Wealth Tax paid on business assets.7. Disallowance under Section 92C of the Income Tax Act.8. Disallowance of claim under Section 43B relating to units sold as slump sale.9. Disallowance of depreciation on UPS.10. Disallowance of Securities Transaction Tax.11. Disallowance of weighted deduction on expenditure incurred on Department of Scientific and Industrial Research under Section 35(2AB).12. Denial of TDS credit.Detailed Analysis:1. Disallowance of Additional Depreciation Claimed Under Section 32(1)(iia):The assessee claimed additional depreciation for assets acquired in the second half of the previous year. The Assessing Officer (AO) disallowed the claim, stating that additional depreciation cannot be carried forward. The Tribunal, referencing judicial decisions and the Finance Minister's speech, directed the AO to allow the additional depreciation, as the claim was valid for assets acquired after 31.03.2005.2. Disallowance of Additional Depreciation on Assets Eligible for 100% Deduction:The assessee claimed additional depreciation on assets eligible for 100% depreciation. The AO disallowed the claim, interpreting that additional depreciation is not allowed for assets already eligible for 100% deduction. The Tribunal upheld the AO's decision, stating the legislative provisions do not support the claim for additional depreciation on such assets.3. Disallowance of Additional Depreciation on Leased Assets (Windmills):The assessee claimed additional depreciation on windmills leased out. The AO disallowed the claim, arguing that additional depreciation is only available for assets used in manufacturing or production. The Tribunal upheld the AO's decision, stating that leased windmills do not qualify for additional depreciation under Section 32(1)(iia).4. Disallowance of Depreciation on Residential Building:The assessee claimed 10% depreciation on residential buildings, whereas the applicable rate is 5%. The AO disallowed the excess claim. The Tribunal upheld the AO's decision, confirming that depreciation on residential buildings should be allowed at 5% as per Income Tax Rules.5. Disallowance Under Section 14A Read with Rule 8D:The AO disallowed expenses under Section 14A for earning exempt income, using Rule 8D for calculation. The Tribunal directed the AO to disallow 2% of the exempt income as per the jurisdictional High Court decision, since Rule 8D is applicable from the assessment year 2008-09 and not retrospectively.6. Disallowance of Wealth Tax Paid on Business Assets:The AO disallowed the claim of Wealth Tax paid on business assets under Section 40(iia). The Tribunal confirmed the disallowance, stating that Wealth Tax is not deductible as per the clear provisions of the Act.7. Disallowance Under Section 92C:The AO, based on the Transfer Pricing Officer's (TPO) order, made adjustments to the Arms Length Price (ALP) of international transactions. The Tribunal remitted the issue to the AO for reconsideration, directing the AO to consider the revised Form 3CEB submitted by the assessee and provide adequate opportunity for hearing.8. Disallowance of Claim Under Section 43B Relating to Units Sold as Slump Sale:The AO disallowed the claim for statutory dues on the slump sale of a unit. The Tribunal remitted the issue to the AO to verify the payment of statutory dues and allow the deduction if the payments are made and evidenced.9. Disallowance of Depreciation on UPS:The AO disallowed the higher depreciation claimed on UPS, treating it as general plant and machinery. The Tribunal upheld the AO's decision, allowing depreciation at 25% instead of 80%, stating that UPS is not an integral part of the computer or an energy-saving device.10. Disallowance of Securities Transaction Tax:The AO disallowed the deduction of Securities Transaction Tax (STT) from the sale value of investments. The Tribunal directed the AO to verify the computation and delete the addition if the STT was not claimed as a business expenditure.11. Disallowance of Weighted Deduction on Expenditure Under Section 35(2AB):The AO initially disallowed the weighted deduction due to the non-submission of Form 3CL. The Tribunal noted that the AO had rectified the order and allowed the deduction upon submission of the form, hence the ground was dismissed as not pressed by the assessee.12. Denial of TDS Credit:The AO denied TDS credit claimed by the assessee. The Tribunal directed the AO to verify the TDS credit as per Form 16A and allow the credit accordingly.Conclusion:The Tribunal's judgment addressed various grounds raised by the assessee, providing relief in some cases and upholding the AO's decisions in others. The judgment emphasized the importance of adhering to legislative provisions and judicial precedents in tax assessments.