Court directs reassessment of depreciation allowance and business expenditure, upholding tribunal decision on natural justice violation.

The court remitted the issue of eligibility for depreciation allowance on a building held on a long-term lease back to the tribunal for clarification. It also directed the tribunal to reassess the disallowance of business expenditure under Section 14A based on actual expenses rather than an ad-hoc estimate. The court upheld the tribunal's decision on the violation of natural justice in the assessment order, emphasizing the requirement for substantial legal questions to warrant intervention. The appeals were disposed of, with instructions for reexamination of specific issues within six weeks.

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Issues:
1. Eligibility for depreciation allowance on a building held on long-term lease.
2. Disallowance of business expenditure under Section 14A based on ad-hoc estimate.
3. Violation of natural justice in making additions to assessment order without notice.

Eligibility for Depreciation Allowance:
The court considered whether a building held on a long-term lease for 99 years, used for business purposes, is eligible for depreciation allowance under Section 32 of the Income Tax Act, 1961. The court analyzed the definition of transfer under Section 269UA(f) and Section 27(iiib) to determine if a lessee with a 12-year lease can be deemed the owner of the building. It was noted that the tribunal did not clearly establish the duration of the lease in question, leading to a lack of clarity. The court remitted this issue back to the tribunal for redetermination.

Disallowance of Business Expenditure under Section 14A:
The court examined whether business expenditure could be disallowed under Section 14A based on an ad-hoc estimate of 1% of dividend income. The tribunal had applied a 10% rule for such deductions, which was challenged by the revenue as being arbitrary. The court agreed that deductions should be based on actual expenses determined by the department and not on a random basis. As there was no clear determination of deductible expenses, the court remitted this issue back to the tribunal for proper assessment.

Violation of Natural Justice in Assessment Order:
The court addressed the issue of whether additions made to the assessment order without notice to the assessee violated principles of natural justice. The tribunal had rejected the contention that the assessee was not given a proper opportunity to present their case. The court, under Section 260A, could only interfere if a substantial question of law was involved. It was decided not to entertain the appeal on this ground to prevent a flood of similar appeals. The court upheld the tribunal's finding on this matter as a question of fact and not a substantial legal issue.

In conclusion, the court disposed of both appeals and directed the tribunal to reexamine the issues of depreciation allowance and disallowance of business expenditure within six weeks. The court declined to interfere with the finding regarding the violation of natural justice, emphasizing the need for substantial legal questions to be raised for intervention under Section 260A.

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