Depreciation on roads and leasehold rights upheld, while section 14A disallowance failed for absence of exempt income.

Depreciation was upheld on roads by treating them as part of a building for the applicable depreciation rate, following the assessee's earlier year treatment. Leasehold rights in land were also held eligible for depreciation as a capital asset / intangible asset on the reasoning applied in the assessee's case. On section 14A read with Rule 8D, no disallowance was permitted because no exempt income had accrued or been received during the year. The Revenue's appeals were rejected and the relief granted to the assessee was sustained on all disputed issues.

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Issues: (i) Whether depreciation on roads was allowable by treating the roads as forming part of building; (ii) Whether leasehold rights in land constituted an intangible asset eligible for depreciation; (iii) Whether disallowance under section 14A read with Rule 8D could be made in the absence of exempt income.

Issue (i): Whether depreciation on roads was allowable by treating the roads as forming part of building.

Analysis: The claim for depreciation on roads was considered in the light of the earlier order in the assessee's own case and the relevant depreciation schedule. The roads were treated as falling within the category of building for depreciation purposes, and the earlier view allowing depreciation at the applicable building rate was followed.

Conclusion: The issue was decided in favour of the assessee and depreciation on roads as building was upheld.

Issue (ii): Whether leasehold rights in land constituted an intangible asset eligible for depreciation.

Analysis: Leasehold rights were examined as an interest in land creating a capital asset within the meaning of section 2(14) of the Income-tax Act, 1961. On that basis, and following the reasoning adopted in the assessee's case, the leasehold rights were held eligible for depreciation.

Conclusion: The issue was decided in favour of the assessee and depreciation on leasehold rights was upheld.

Issue (iii): Whether disallowance under section 14A read with Rule 8D could be made in the absence of exempt income.

Analysis: The disallowance was examined against the factual position that no exempt income had accrued or been received. Applying the principle that expenditure under section 14A cannot be disallowed in a year where no exempt income exists, the Tribunal upheld deletion of the disallowance.

Conclusion: The issue was decided in favour of the assessee and the section 14A disallowance was deleted.

Final Conclusion: All the Revenue's appeals were rejected, and the assessee's relief granted by the first appellate authority was sustained on all disputed issues.

Ratio Decidendi: Depreciation may be allowed on assets treated as building or on leasehold rights constituting a capital asset where the statutory conditions are met, and section 14A read with Rule 8D cannot be invoked in a year in which no exempt income exists.

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