Tribunal decision: Disallowance adjustments directed for Section 14A and 115JB, depreciation claim upheld

The Tribunal partially allowed both the assessee's and the Revenue's appeals. It directed the Assessing Officer to adopt the disallowance workings of Rs. 99,600 for both Section 14A and Section 115JB computations. Additionally, the Tribunal upheld the assessee's claim for depreciation on the revised Written Down Value (WDV) of assets acquired from the holding company, citing favorable precedents from earlier cases.

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Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 14A while computing book profit under Section 115JB.
3. Depreciation on revised Written Down Value (WDV) of assets acquired from the holding company.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue in the assessee's appeal (ITA No.1198/Mum/2019) was the disallowance made under Section 14A of the Income Tax Act. The assessee earned dividend income of Rs. 14,16,742, which was claimed as exempt. However, no disallowance of expenses incurred to earn this exempt income was made in the return. During the assessment proceedings, the assessee submitted a working of Rs. 99,600 as disallowance, attributing part of the salary costs of employees involved in investment activities. The Assessing Officer (AO) disregarded this and computed the disallowance as Rs. 12,55,853 under Rule 8D(2)(iii).

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the assessee's allocation of expenses was ad hoc and lacked supporting documents. However, the Tribunal found that the investment yielding the dividend was held only for nine days. Applying Rule 8D(2)(iii) would result in an absurdity. Citing the jurisdictional High Court's decision in Pr. Commissioner of Income Tax vs. Lee and Muirhead Pvt. Ltd., the Tribunal directed the AO to adopt the disallowance workings of Rs. 99,600 submitted by the assessee, attributing it proportionately to the nine days the investment was held.

2. Disallowance under Section 14A while computing book profit under Section 115JB:
In the Revenue's appeal (ITA No.1442/Mum/2019), the issue was the disallowance of Rs. 12,55,853 under Section 14A while computing book profit under Section 115JB. The AO had applied the same disallowance computed under Rule 8D(2)(iii) for normal provisions.

The Tribunal referenced the Special Bench of the Delhi Tribunal in Vireet Investments, which held that Rule 8D(2) cannot be applied for disallowance under Clause 'f' of Explanation to Section 115JB(2). However, some expenses must be disallowed under this clause. The Tribunal directed the AO to disallow Rs. 99,600, as computed by the assessee, under Clause 'f' of Explanation to Section 115JB(2).

3. Depreciation on revised Written Down Value (WDV) of assets acquired from the holding company:
The second ground in the Revenue's appeal concerned the depreciation on the revised WDV of assets acquired from the holding company. The assessee had purchased second-hand plant and machinery from its holding company and initially capitalized them at the WDV appearing in the holding company's books. Due to a change in shareholding, the assessee revalued the WDV and claimed depreciation on the higher actual cost.

The Tribunal noted that this issue was adjudicated in the assessee's favor in ITA No.6020/Mum/2011 for A.Y. 2007-08, where it was held that the cost of acquisition should be the actual price paid by the assessee. This decision was upheld by the Hon'ble Bombay High Court. The Tribunal also referenced a similar decision for A.Y. 2008-09, where the High Court dismissed the Revenue's appeal. Following these precedents, the Tribunal dismissed the Revenue's ground on this issue.

Conclusion:
Both the assessee's and the Revenue's appeals were partly allowed. The Tribunal directed the AO to adopt the disallowance workings of Rs. 99,600 for both Section 14A and Section 115JB computations and upheld the assessee's claim for depreciation on the revised WDV of assets acquired from the holding company.

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