Appeal allowed: Depreciation upheld as statutory allowance, not expenditure.

The Tribunal allowed the appeal of the assessee, overturning the disallowance of depreciation. It held that depreciation is a statutory allowance under Section 32 and not an expenditure under Section 14A. The decision was pronounced on 16.11.2016.

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Issues Involved:
1. Disallowance of Depreciation Allowance under Rule 8D of the Income-tax Rules, 1962 read with Section 14A of the Income Tax Act.
2. Nexus of Depreciation and Dividend Income.
3. Nature of Depreciation as an Expenditure.
4. Interpretation of Depreciation Allowance under Section 32 of the IT Act.
5. Disallowance of Administrative Expenses in relation to Dividend Income.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Allowance under Rule 8D of the Income-tax Rules, 1962 read with Section 14A of the Income Tax Act:
The primary issue revolves around whether the depreciation allowance of Rs. 4,28,653/- should be considered as part of the expenditure incurred under Section 14A of the IT Act read with Rule 8D of the IT Rules, 1962. The assessee argued that the depreciation claimed on fixed assets used for business purposes is not an expenditure but a statutory allowance under Section 32 of the IT Act.

2. Nexus of Depreciation and Dividend Income:
The assessee contended that there is no direct and immediate connection between the depreciation allowance and the dividend income earned. The Assessing Officer, however, did not accept this contention and applied Section 14A read with Rule 8D, making an addition of Rs. 6,53,131/-. The first appellate authority accepted the assessee's contention regarding statutory expenses but did not provide relief for the depreciation disallowance.

3. Nature of Depreciation as an Expenditure:
The assessee argued that depreciation is not an expenditure incurred but an allowance mandatory to be allowed as per Section 32 and Explanation 5 thereto. The Tribunal noted that depreciation is a notional expenditure provided on fixed assets and is not an out-of-pocket cost incurred during the assessment year. Section 14A pertains to actual expenditure incurred in relation to earning exempt income, which does not form part of the total income.

4. Interpretation of Depreciation Allowance under Section 32 of the IT Act:
The Tribunal referred to Section 32(1) and Explanation 5, which clarifies that depreciation is a statutory allowance and applies whether or not the assessee has claimed the deduction in computing total income. The Tribunal emphasized that depreciation is not an expenditure in the context of Section 14A, as supported by the ITAT Ahmedabad Special Bench decision in Vishnu Anant Mahajan vs. ACIT, which held that a statutory allowance under Section 32 is not an expenditure.

5. Disallowance of Administrative Expenses in relation to Dividend Income:
The assessee also challenged the disallowance of administrative expenses without establishing any relation to earning dividend income. However, the focus of the Tribunal's analysis remained on the nature of depreciation as a statutory allowance rather than an expenditure.

Conclusion:
The Tribunal concluded that depreciation is a statutory allowance under Section 32 and not an expenditure in the context of Section 14A. Therefore, the appeal of the assessee was allowed, and the disallowance of depreciation was overturned. The Tribunal's decision was pronounced in the open court on 16.11.2016.

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