Appeal partially allowed, issue of depreciation disallowance remitted for verification. Disallowance under Section 14A restricted to Rs. 2,800/-.

The tribunal partially allowed the appeal, remitting the issue of depreciation disallowance back to the AO for verification and restricting the disallowance under Section 14A to Rs. 2,800/-. The order was pronounced on 09.05.2018.

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Issues Involved:
1. Depreciation disallowance of Rs. 17,76,230/-
2. Disallowance under Section 14A of Rs. 48,492/-

Issue-wise Detailed Analysis:

1. Depreciation Disallowance of Rs. 17,76,230/-:

The assessee, engaged in manufacturing auto ancillary parts, claimed depreciation on a property let out to an associated company. The AO disallowed the depreciation claim of Rs. 17,76,230/- on the grounds that the property was generating rental income, which was taxed under "Income from House Property." The assessee argued that only a part of the existing building (701 Sq. Mtrs out of 2528.05 Sq. Mtrs) was let out and claimed that only 27.455% of the depreciation should be disallowed. The CIT(A) upheld the AO's disallowance, stating that the assessee did not provide sufficient evidence to support the claim.

Upon appeal, the tribunal noted that the assessee had filed relevant documents, including a leave and license agreement and building plans, albeit as additional evidence before the CIT(A). The CIT(A) did not call for a remand report on these additional documents, violating Rule 46A of the Income Tax Rules, 1962. The tribunal agreed with the assessee's proposition that only the proportionate depreciation corresponding to the let-out area should be disallowed. However, due to the lack of proper correlation and identification of the property, the matter was remitted back to the AO for verification and correlation of the let-out area with the existing building.

2. Disallowance under Section 14A of Rs. 48,492/-:

The assessee received a dividend income of Rs. 2,800/-, claimed as exempt under Section 10(34). The AO, applying Rule 8D of the Income Tax Rules, 1962, disallowed Rs. 4,43,378/- under Section 14A, which included an additional disallowance of Rs. 48,492/-. The assessee argued that no expenditure was incurred in earning the exempt income and that the disallowance under Section 14A should not exceed the exempt income. The CIT(A) upheld the AO's disallowance.

On appeal, the tribunal admitted the additional ground that disallowance under Section 14A cannot exceed the exempt income, citing several judicial precedents. The tribunal observed that the assessee's own funds exceeded the investments, invoking the presumption that investments were made from interest-free funds. The tribunal referred to the decisions of the Hon’ble Bombay High Court in HDFC Bank Ltd. and Reliance Utilities and Power Ltd., which support this presumption. Consequently, the tribunal restricted the disallowance under Section 14A to Rs. 2,800/-, aligning with the exempt income, and allowed the additional ground raised by the assessee.

Conclusion:

The tribunal allowed the appeal partly, remitting the issue of depreciation disallowance back to the AO for verification and restricting the disallowance under Section 14A to Rs. 2,800/-. The order was pronounced in the open court on 09.05.2018.

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