2020 (8) TMI 48 - AT - Income Tax

Tribunal directs AO to recompute Section 14A disallowance, allows higher UPS depreciation

The Tribunal dismissed the Revenue's appeal, directing the AO to recompute the disallowance under Section 14A, considering only investments yielding ... Disallowance under section 14A read with Rule 8D - investments yielding exempt dividend income - interest expenditure for computation under Rule 8D - disallowance cannot exceed actual exempt dividend income - SAR (Stock Appreciation Rights) expenditure: capital v. revenue nature - ascertained liability under SEBI guidelines - depreciation rate for UPS as part of computer systemDisallowance under section 14A read with Rule 8D - investments yielding exempt dividend income - interest expenditure for computation under Rule 8D - disallowance cannot exceed actual exempt dividend income - Computation and quantum of disallowance under section 14A read with Rule 8D - HELD THAT: - The Tribunal applied the principle that disallowance under section 14A cannot exceed the actual exempt dividend income, relying on the decision of Maxopp Investments Ltd. , and dismissed the Revenue's ground seeking a larger disallowance. The Tribunal found merit in the assessee's contention that, for computing average investment under Rule 8D, only those investments which yielded exempt dividend income during the year should be taken into account, following the decision of the High Court in ACB India Ltd. and earlier Tribunal directions in the assessee's own case. The Tribunal further held that certain items (bank guarantee commission, interest on TDS, interest on service tax, interest on professional tax, interest paid to clients on advance brokerage, interest on clients' margin money, etc.) are not properly includible as interest expenditure for Rule 8D purposes. In consequence, the Tribunal remitted the matter to the Assessing Officer to (a) identify and take into account only the investments that yielded dividend income for computing average investment; (b) recompute interest expenditure to be considered under Rule 8D in accordance with fact and law; and (c) keep in view the assessee's own funds and free reserves in applying any disallowance out of interest expenditure, giving the assessee an opportunity of being heard. The Tribunal expressly directed the AO to be guided by precedents including Reliance Industries Ltd. , HT Media and Taikisha Engineering India Ltd. while recomputing the disallowance. [Paras 17, 18]Revenue's challenge that disallowance should exceed exempt income dismissed; issue remanded to AO for recomputation of disallowance under section 14A read with Rule 8D limited by the principles stated.SAR (Stock Appreciation Rights) expenditure: capital v. revenue nature - ascertained liability under SEBI guidelines - Allowability of SAR-related write-offs as business expenditure under section 37(1) (capital v. revenue character) - HELD THAT: - The Tribunal noted conflicting orders in earlier rounds: the CIT(A) sustained the AO's view treating the SAR-related amounts as capital (not allowable), relying on prior findings; however, a coordinate bench of the Tribunal in the immediately preceding assessment year allowed the assessee's claim treating the SAR expense as revenue (ascertained liability) and the High Court dismissed Revenue's appeal against that decision. Respectfully following the High Court's decision in the assessee's own case and the coordinate bench authorities, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition in respect of SAR expenses, thereby treating the SAR-related write-offs as allowable expenditure for the year under consideration. [Paras 21, 23]CIT(A)'s confirmation of disallowance on SAR expenses set aside; AO directed to delete the addition.Depreciation rate for UPS as part of computer system - Rate of depreciation on UPS claimed as an essential part of computer system - HELD THAT: - The Tribunal found no infirmity in the CIT(A)'s conclusion that UPS units, being essential parts of computer systems, qualify for the higher depreciation rate claimed by the assessee. The Tribunal observed that decisions of the Delhi High Court (BSES Yamuna Powers Ltd. and BSES Rajdhani Powers Ltd.) support the view that UPS is an essential part of computer systems and eligible for depreciation at the higher rate. Having regard to these precedents and other authorities relied upon, the Tribunal upheld the CIT(A)'s direction to allow depreciation at the higher rate. [Paras 25]CIT(A)'s allowance of higher depreciation on UPS (as part of computer system) upheld; Revenue's ground dismissed.Final Conclusion: The Revenue's appeal is dismissed. The assessee's appeal is allowed for statistical purposes: the section 14A/Rule 8D disallowance issue is remitted to the AO for recomputation consistent with the Tribunal's directions (disallowance limited by actual exempt dividend income and computed only on investments yielding such income; proper exclusion of non-relevant interest items and consideration of own funds), SAR-related disallowance is deleted, and higher depreciation on UPS is upheld. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Depreciation rate on UPS.3. Deduction of SAR (Stock Appreciation Rights) expenditure.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The assessee declared a dividend income of Rs. 3 crore, claiming it as exempt. The AO disallowed Rs. 5,80,61,219/- under Section 14A read with Rule 8D, after considering the suo motu disallowance of Rs. 2,75,99,362/- made by the assessee. The CIT(A) restricted the disallowance to the extent of the exempt income of Rs. 3 crore. The Tribunal noted that the assessee had miscalculated the disallowance under a misconception of law by including investments not yielding dividend income. Citing the Delhi High Court's decision in ACB India Ltd., the Tribunal held that only investments yielding exempt income should be considered. The Tribunal restored the issue to the AO to recompute disallowance, considering only investments yielding dividend income and excluding certain interest expenditures like bank guarantee commission, interest on TDS, etc. The Tribunal also emphasized considering the assessee’s own funds and free reserves vis-à-vis investments. The Tribunal dismissed the Revenue's appeal on this issue, following the Supreme Court's ruling in Maxopp Investments Ltd. that disallowance under Section 14A cannot exceed the actual exempt income received.2. Depreciation Rate on UPS:The assessee claimed depreciation on UPS at 60%, treating it as part of the computer system. The AO allowed depreciation at 15%, treating UPS as plant and machinery. The CIT(A) allowed the higher rate of depreciation at 60%, which the Tribunal upheld. The Tribunal referred to the Delhi High Court's decisions in CIT vs. BSES Yamuna Powers Ltd. and CIT vs. BSES Rajdhani Powers Ltd., which held that UPS is an essential part of the computer system and eligible for 60% depreciation. Consequently, the Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on this issue.3. Deduction of SAR (Stock Appreciation Rights) Expenditure:The AO disallowed Rs. 1,64,73,853/- on account of SAR expenses, treating it as capital expenditure. The CIT(A) sustained this disallowance. However, the Tribunal referred to its earlier decision in the assessee's own case for the previous assessment year, where it allowed the claim of the assessee, treating SAR expenses as revenue expenditure. The Tribunal noted that the Hon’ble Delhi High Court in CIT vs. Lemon Tree Hotels Ltd. and the Madras High Court in PVP Ventures Ltd. had upheld that SAR expenses are ascertained liabilities and deductible as revenue expenditure. Following these precedents, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal on this issue.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing the AO to recompute the disallowance under Section 14A and to delete the addition related to SAR expenses. The Tribunal upheld the CIT(A)'s decision to allow higher depreciation on UPS at 60%.