2016 (5) TMI 254 - AT - Income Tax

Tribunal upholds CIT(A) on interest disallowance, reverses on RMC depreciation, dismisses Rule 8D(2)(iii) appeal

The Tribunal upheld the CIT(A)'s decision to dismiss the Revenue's appeal on the disallowance under Rule 8D(2)(ii), as no interest expenditure was ... Disallowance u/s.14A - Held that:- When the authorities below have observed that the assessee has received ₹.70.00 lakhs from the group concern was interest free and no interest was debited on this amount, the ld. CIT(A) has rightly held that the disallowance under Rule 8D(2)(ii) cannot be made when there was no interest burden on the amount borrowed from the group concern - Decided against revenue. Disallowance of additional depreciation on Ready Mix Concrete [RMC] - Held that:- The assessee is not entitled for additional depreciation in respect of machinery used since production of ready mix concrete would not amount to manufacture of article or thing Disallowance made under Rule 8D(2)(iii) - Held that:- Assessing Officer rightly invoked the Rule-8D and arrived at the disallowance of expenses u/s.14A r.w.Rule-8D. In order to arrive at a reasonable amount of expenditure, which may vary from case to case and situation to situation, the legislature, after taking various factors into consideration, came to a conclusion that such expenses can be reasonably calculated @ 0.5% of the average investments made by the assessee. For this purpose, the legislature has arrived at a common formula to calculate the expenses @ 0.5% of the average investments made as per step-3 of the formula given in Rule-8D. Accordingly the legislature incorporated and introduced the Rule-8D. Further, as could be seen from the assessment order, the Assessing Officer has rightly quantified the expenditure under Rule 8D(2)(iii) and disallowed under section 14A of the Act. Issues Involved:1. Disallowance under Rule 8D(2)(ii) related to Section 14A of the Income Tax Act.2. Additional depreciation on Ready Mix Concrete (RMC).Issue-wise Detailed Analysis:1. Disallowance under Rule 8D(2)(ii) related to Section 14A of the Income Tax Act:The Revenue contested the CIT(A)'s direction to the AO to withdraw the disallowance made under Rule 8D(2)(ii). The Assessing Officer (AO) had observed that the assessee invested Rs. 70 crores in equity shares of M/s. Allied Metals and Minerals P Ltd (AMM) during the year, funded by unsecured loans and reserves, and claimed interest expenditure of Rs. 2,85,70,074/-. The AO concluded that the investment was made out of borrowed capital, leading to disallowance under Section 14A, even though no dividend income was earned. The AO relied on the Delhi Tribunal's decision in Cheminvest Ltd. v. ITO, which held that disallowance under Section 14A is warranted even if no exempt income is earned.The CIT(A), however, directed the AO to withdraw the disallowance under Rule 8D(2)(ii) since the investment was made from interest-free funds received from a group company, Chettinad Corporation Ltd., and no interest was incurred on this amount. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had proved the funds were interest-free and the AO had not demonstrated that unsecured loans were used for investment purposes. The Tribunal emphasized that commercial expediency is a matter for the assessee's judgment, and the AO cannot question the use of interest-bearing funds for business purposes when interest-free funds are used for investments.2. Additional depreciation on Ready Mix Concrete (RMC):The Revenue challenged the CIT(A)'s decision to allow additional depreciation on RMC. The AO had denied the claim on the grounds that the assessee was engaged in civil construction, not manufacturing. The CIT(A) allowed the claim, following the decision for the previous assessment year, where the facts were similar.The Tribunal, however, reversed the CIT(A)'s decision, citing the Cochin Bench of ITAT's ruling in Cherian Varkey Construction Co. (P) Ltd. v. ACIT, which held that the production of RMC does not amount to manufacturing of an article or thing, and thus, additional depreciation is not allowable. The Tribunal followed this precedent, restoring the AO's decision and disallowing the additional depreciation claim.Conclusion:The Tribunal dismissed the Revenue's appeal regarding the disallowance under Rule 8D(2)(ii), upholding the CIT(A)'s decision that no interest expenditure was incurred on the funds used for investment. However, the Tribunal allowed the Revenue's appeal on the issue of additional depreciation on RMC, reversing the CIT(A)'s decision and restoring the AO's disallowance. The assessee's appeal regarding the disallowance under Rule 8D(2)(iii) was dismissed, affirming the CIT(A)'s decision to sustain the disallowance.