Appeals dismissed on depreciation, 14A disallowance deleted, interest disallowance partly allowed.

The appeals challenging the disallowance of depreciation on plant and machinery were dismissed for the relevant assessment years. The disallowance under section 14A was deleted, and the addition to book profits under section 115JB(2) was reconsidered for one assessment year. The disallowance of interest paid on borrowings was partly allowed, with a restriction to 2% disallowance of the interest rate difference for another assessment year.

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Issues Involved:
1. Disallowance of depreciation on plant and machinery.
2. Disallowance of security deposit written off.
3. Disallowance under section 14A of the Income-tax Act.
4. Addition to book profits under section 115JB(2).
5. Disallowance of interest paid on borrowings.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation on Plant and Machinery:
The primary contention revolves around the disallowance of depreciation claimed by the assessee on plant and machinery given on lease. The assessee argued that the plant and machinery were part of the block of assets and were used in the business, even though no lease rent was generated during the relevant assessment years. The assessee cited various judicial precedents, including the Supreme Court's decision in ICDS Ltd vs CIT and the Karnataka High Court's decision in Manipal Finance Corporation Ltd vs ACIT, to support the claim that the assets were used for business purposes and thus eligible for depreciation.

The Revenue countered that the assessee did not earn any income from these assets, failing one of the twin conditions for claiming depreciation. The Tribunal agreed with the Revenue, noting the lack of evidence to substantiate the existence and usage of the plant and machinery. No lease or hire purchase agreements were provided to support the claim. Consequently, the ground of appeal regarding the disallowance of depreciation was dismissed for all assessment years under consideration (AY 2010-11, AY 2011-12, and AY 2012-13).

2. Disallowance of Security Deposit Written Off:
This issue pertains to the disallowance of a security deposit written off, amounting to Rs. 14,68,800, under section 37(1) of the Act. The assessee claimed it as a business expense, while the Revenue treated it as a capital loss. However, this specific ground was not elaborated upon in the judgment provided, and thus the outcome remains unclear from the provided text.

3. Disallowance under Section 14A:
For AY 2011-12, the assessee challenged the disallowance under section 14A read with Rule 8D, arguing no exempt income was earned during the relevant assessment year. The Tribunal referred to the Delhi Special Bench decision in ACIT vs Vireet Investments Pvt. Ltd., which held that no disallowance under section 14A should be made if no exempt income is earned. Accordingly, the Tribunal directed the AO to delete the disallowance for AY 2011-12.

4. Addition to Book Profits under Section 115JB(2):
The assessee disputed the addition of Rs. 23,84,651 to the book profits under clause (f) of Explanation 1 to Section 115JB(2), which was based on the suo-moto disallowance under section 14A. The Tribunal, aligning with its decision on the disallowance under section 14A, directed the AO to reconsider the addition to book profits, as no exempt income was earned during the year. This ground was allowed for AY 2011-12.

5. Disallowance of Interest Paid on Borrowings:
For AY 2012-13, the issue involved the disallowance of Rs. 1,52,76,998 as interest paid on borrowings. The AO disallowed the interest, arguing that the loan was advanced to a group concern at a lower interest rate, indicating a diversion of funds. The Tribunal acknowledged the commercial expediency of the transaction but noted that the interest rate charged was below the State Bank of India's rate. Thus, the Tribunal restricted the disallowance to 2%, representing the difference between the borrowing rate and the SBI rate during the relevant period. This ground was partly allowed.

Conclusion:
- The appeals regarding the disallowance of depreciation on plant and machinery were dismissed for AY 2010-11, AY 2011-12, and AY 2012-13.
- The disallowance under section 14A was deleted, and the addition to book profits under section 115JB(2) was reconsidered for AY 2011-12.
- The disallowance of interest paid on borrowings was partly allowed for AY 2012-13, with a restriction to 2% disallowance of the interest rate difference.

The judgment was pronounced in the open court on 31-07-2019.

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