2016 (9) TMI 1211 - AT - Income Tax

Tribunal overturns disallowances on expenses & depreciation, confirms deletion of exempted income adjustments.

The Tribunal allowed the appeal, overturning disallowances related to expenses linked to exempted income under Section 14A of the Income Tax Act and ... Addition u/s 14A - Held that:- We noted from the above facts that the assessee before the CIT (A) has demonstrated from the balance sheet that it was having interest funds available with it for investment in shares. The AO or the CIT (A) has nowhere proved the nexus of tax free income generated out of investments made from interest bearing funds, despite the fact that the entire facts were available before them. The assessee has reasonably demonstrated before us that the interest free funds i.e. assessee’s own share capital as well as reserves and surplus is more than ₹ 20 Crores as against the investments in shares that gave tax free income at ₹ 1.03 Crores which is much more lower than the interest free funds available. Hence, this being the position, we are of the view that the assessee’s case is squarely covered by the decision of the Hon’ble Bombay High Court in the case of HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT ] wherein held if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. - Decided in favour of assessee Disallowance of depreciation on motor car - car is registered in the name of one of the directors and legal ownership is not in the name of the Assessee Company - Held that:- We find from the facts of the case that the assessee has purchased the motor car from its own funds but registered the same in the name of one of the directors. There is no dispute about this fact. In such a circumstance, the issue is covered by the decision of the Hon’ble Bombay High Court in the case of CIT Vs Dilip Singh Sardarsingh Bagga (1992 (9) TMI 74 - BOMBAY High Court ) wherein it has been categorically held that “registration under Motor Vehicle Act is not essential requirement for acquiring ownership of the motor vehicle and purchasing of motor vehicle for valuable consideration from assessee’s account and using the same for the business purpose, depreciation cannot be denied on the ground that the vehicle was not registered in assessee’s name”. Following the above decision of the Hon’ble Bombay High Court in the case of Dilip Singh Sardarsingh Bagga (supra) we allow the claim of the assessee. Issues:1. Disallowance of expenses relatable to exempted income under Section 14A of the Income Tax Act.2. Disallowance of depreciation on motor car due to registration in the name of a director.3. Disallowance of expenses qua exempted income while computing book profit under Section 115JB of the Act.Issue 1: Disallowance of expenses relatable to exempted income under Section 14A of the Income Tax Act:The assessee appealed against the CIT (A)'s order confirming the disallowance of expenses related to exempted income under Section 14A of the Act. The AO invoked Rule 8D of the Rules and disallowed total expenses of Rs. 11,02,270. The assessee contended that funds were available for investments in shares, and the AO mechanically applied Rule 8D without considering the availability of funds. The CIT (A) upheld the disallowance without addressing the availability of funds. The Tribunal noted that the assessee demonstrated interest-free funds exceeding investments generating tax-free income. Citing a Bombay High Court decision, the Tribunal allowed the appeal, emphasizing the presumption that investments were made from interest-free funds when available funds suffice.Issue 2: Disallowance of depreciation on motor car due to registration in the name of a director:The appeal challenged the disallowance of depreciation on a motor car registered in the name of a director, not the Assessee Company. The AO disallowed depreciation, alleging an immoral practice to avoid higher registration charges. The Tribunal observed that the car was purchased using the company's funds but registered in the director's name. Relying on a Bombay High Court decision, the Tribunal allowed the claim, stating that ownership is not contingent on registration under the Motor Vehicle Act when a vehicle is purchased from the company's account for business purposes.Issue 3: Disallowance of expenses qua exempted income while computing book profit under Section 115JB of the Act:The third issue pertained to the disallowance of expenses concerning exempted income while computing book profit under Section 115JB. The Tribunal had already addressed and deleted this disallowance in the first issue. Consequently, the same decision applied to computing book profit under Section 115JB, leading to the allowance of this ground of appeal by the assessee.In conclusion, the Tribunal allowed the appeal of the assessee, overturning the disallowances related to expenses relatable to exempted income and depreciation on a motor car. The Tribunal also confirmed the deletion of disallowances concerning exempted income while computing book profit under Section 115JB of the Act.