2018 (4) TMI 391 - AT - Income Tax

Tribunal allows higher depreciation on windmill construction, upholds CIT(A)'s decision on deductions, dismisses Revenue's appeal.

The tribunal allowed the assessee's claim for higher depreciation at 80% on civil construction related to windmills, contrary to the AO's disallowance. It ... Disallowance u/s. 14A - Held that:- Case of HDFC Bank Ltd. v. DCIT reported in (2016 (3) TMI 755 - BOMBAY HIGH COURT) will apply and presumption will apply that assessee has invested its own funds in making of the investment in Mutual Funds and there is no finding recorded by authorities below that interest bearing funds were specifically used for making investments in Mutual Funds and no direct nexus between interest bearing funds with the investments made in Mutual Funds are brought on record. Thus, the addition to the tune of ₹ 3,53,455/- as was made under rule 8D2(ii) r.w.s. 14A stood deleted but so far as disallowance under rule 8D 2(iii) r.w.s. 14A of the 1961 Act to the tune of ₹ 5,77,419/- being @0.5% of the average investments as was made by the AO which was later upheld by learned CIT(A) stood confirmed as we find no justification for the deletion of the same and we have no hesitation in confirming the addition to the tune of ₹ 5,77,419/- to the income of the assessee u/s 14A r.w.r. 8D(2)(iii) . The assessee gets part relief. Deduction u/s. 10B with respect to its 100% EOU should be allowed even on income from interest and miscellaneous income - Held that:- We are of the considered view that the AO has not examined the direct nexus between the interest income as well miscellaneous income and export income derived by the assessee from eligible industrial undertaking of the assessee on which deduction u/s 10B is available which requires examination of the facts, hence keeping in view ratio of decision in the case of India Comnet International v. ITO reported in (2012 (9) TMI 372 - SUPREME COURT), the matter is set aside to the file of the AO for examination/verification of direct nexus between income from interest as well miscellaneous income and income derived from exports business by 100% export oriented eligible undertaking of the assessee to see whether the said income can fall within the ambit of being derived from export business of the eligible industrial undertaking being 100% EOU. Depreciation of eligible unit which stood adjusted against other business income from non eligible in the earlier years can not now be adjusted on notional basis against the income of eligible unit for the impugned assessment year while computing deduction u/s 80IA. See CIT v. Hercules Hoists Ltd. [2017 (6) TMI 1125 - BOMBAY HIGH COURT] Issues Involved:1. Disallowance of depreciation on civil construction related to windmills.2. Disallowance under Section 14A of the Income Tax Act, 1961.3. Disallowance of deduction under Section 80IA.4. Disallowance of exemption under Section 10B.Detailed Analysis:1. Disallowance of Depreciation on Civil Construction Related to Windmills:The assessee claimed depreciation at 80% on the cost of civil construction related to windmills, arguing that the civil construction is an integral part of the windmill. The Assessing Officer (AO) disallowed this, granting only normal depreciation on civil construction, treating it as a building. The learned Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, referencing the ITAT Pune decision in Poonawala Finvest & Agro P. Ltd. However, the tribunal noted that in the assessee's own case for the assessment years 2006-07 to 2010-11, it had allowed the higher depreciation claim, as the civil and electrical works were integral to the windmill. Thus, the tribunal allowed the assessee's claim for higher depreciation at 80%.2. Disallowance under Section 14A of the Income Tax Act, 1961:The AO invoked Section 14A read with Rule 8D to disallow Rs. 9,30,874/- as expenditure related to earning exempt income. The assessee argued that investments were made from its own funds, and relied on the Bombay High Court decision in Reliance Utilities and Power Ltd. The CIT(A) upheld the AO's decision, citing precedents. The tribunal, however, found that the assessee had sufficient own funds to cover the investments, thus deleting the disallowance under Rule 8D(2)(ii) but upholding the disallowance under Rule 8D(2)(iii).3. Disallowance of Deduction under Section 80IA:The AO disallowed the assessee's claim for deduction under Section 80IA, arguing that notional depreciation from previous years should be deducted before computing the eligible profit. The CIT(A) allowed the assessee's claim, following the decision in the assessee's favor for the assessment year 2010-11. The tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in Hercules Hoists Ltd., which stated that losses set off in earlier years should not be notionally deducted in subsequent years for Section 80IA computations.4. Disallowance of Exemption under Section 10B:The AO disallowed the exemption under Section 10B for interest and miscellaneous income, arguing these were not derived from export business. The CIT(A) upheld this disallowance, referencing decisions from the Madras High Court and ITAT Mumbai. The tribunal remanded the issue back to the AO for verification of the direct nexus between the interest/miscellaneous income and the export business, following the Supreme Court's decision in India Comnet International.Conclusion:The tribunal provided partial relief to the assessee by allowing the higher depreciation claim on windmill-related civil construction and deleting part of the disallowance under Section 14A. It upheld the CIT(A)'s decision on Section 80IA deductions and remanded the Section 10B exemption issue back to the AO for further verification. The Revenue's appeal was dismissed.