2022 (2) TMI 159 - AT - Income Tax

High Court remits unabsorbed depreciation issue to Tribunal, allows set-off citing Section 32(2) amendment.

The High Court remitted the issue of carrying forward unabsorbed depreciation from AYs 1997-98 to 1999-2000 back to the Tribunal. The Tribunal allowed the ... Carry forward of unabsorbed depreciation - Prospective effect of amendment to Section 32(2) - Applicability of amended Section 32(2) to unabsorbed depreciation available on 01.04.2002 - Dispensation of eight year limitation for carry forward of unabsorbed depreciation - Disallowance under Section 14A of the Income tax Act read with Rule 8D - Requirement of Assessing Officer's objective satisfaction before invoking Rule 8D - Limitation of Section 14A disallowance to amount of exempt income - Non inclusion of Section 14A adjustment in computation of book profits under Section 115JBCarry forward of unabsorbed depreciation - Prospective effect of amendment to Section 32(2) - Applicability of amended Section 32(2) to unabsorbed depreciation available on 01.04.2002 - Dispensation of eight year limitation for carry forward of unabsorbed depreciation - Whether unabsorbed depreciation relating to earlier assessment years (up to AY 2001-02) available as on 01.04.2002 could be carried forward and set off without the eight year limitation in view of the amendment to Section 32(2) by Finance Act, 2001. - HELD THAT: - The Tribunal, after considering the CBDT Circular No.14/2001 and binding High Court decisions (including the Division Bench of the Gujarat High Court in General Motors India (P.) Ltd.), held that the amendment to Section 32(2) effected by Finance Act, 2001 (applicable from AY 2002 03) dispensed with the restriction of eight assessment years for carry forward and set off. Any unabsorbed depreciation available to an assessee on 1st April, 2002 (A.Y. 2002 03) is to be dealt with under the amended Section 32(2); such unabsorbed depreciation from A.Y. 1997 98 up to A.Y. 2001 02 got carried forward to A.Y. 2002 03 and became part of depreciation for that year and thereafter may be carried forward and set off without any temporal limit. The Tribunal distinguished the Supreme Court decision in Peerless (which concerned the head against which unabsorbed depreciation could be set off and the eight year rule in that factual matrix) and followed later High Court precedents applying the CBDT circular and the purposive intent of the amendment. Applying these legal principles to the facts, the revenue's grounds on this issue were dismissed.Unabsorbed depreciation available as on 01.04.2002 shall be governed by Section 32(2) as amended by Finance Act, 2001 and may be carried forward and set off without the eight year limitation.Disallowance under Section 14A of the Income tax Act read with Rule 8D - Requirement of Assessing Officer's objective satisfaction before invoking Rule 8D - Limitation of Section 14A disallowance to amount of exempt income - Non inclusion of Section 14A adjustment in computation of book profits under Section 115JB - Extent and manner of disallowance under Section 14A read with Rule 8D and the procedural requirement for the Assessing Officer before applying Rule 8D; and whether the disallowance can be adjusted while computing book profits under Section 115JB. - HELD THAT: - The Tribunal reiterated the principle laid down by the Supreme Court in Godrej & Boyce that sub sections (2) and (3) of Section 14A read with Rule 8D prescribe a formula to be employed only after the Assessing Officer records satisfaction that, having regard to the accounts placed before him, he cannot be satisfied about the correctness of the assessee's claim. In the present facts the AO had not recorded any objective satisfaction and had mechanically applied Rule 8D; that jurisdictional requirement was absent and made the disallowance unsustainable. The Tribunal further accepted that where the assessee's own funds (capital, reserves, surplus) materially exceed investments, a presumption in favour of the assessee arises unless the AO establishes nexus of borrowings to the investments; in such circumstances interest disallowance cannot be made. It was affirmed that disallowance under Section 14A cannot exceed the exempt income for the year and that for computation under Rule 8D(2)(iii) only investments yielding exempt income in the year are to be considered. Finally, the Tribunal held that Section 14A disallowance should not be adjusted while computing book profits under Section 115JB, following precedent. The matter was therefore remitted for the AO to record objective satisfaction (if any), grant opportunity, and then compute disallowance in accordance with these legal parameters.AO must record objective satisfaction before invoking Rule 8D; if so recorded and after hearing the assessee, Rule 8D may be applied subject to limits that disallowance cannot exceed exempt income and only investments yielding exempt income are to be considered; Section 14A adjustment is not to be made in computation of book profits under Section 115JB.Final Conclusion: On the issues adjudicated, the revenue's appeals are dismissed. The Tribunal upheld that unabsorbed depreciation available as on 01.04.2002 is governed by the amended Section 32(2) and may be carried forward without the eight year limit. As to disallowance under Section 14A, the AO must record objective satisfaction before applying Rule 8D; disallowance cannot exceed the exempt income and Rule 8D computations must consider only investments yielding exempt income; Section 14A disallowance is not to be adjusted while computing book profits. The assessee's appeals are partly allowed for statistical purposes. Order pronounced on 21st January, 2022. Issues Involved:1. Unabsorbed Depreciation2. Disallowance under Section 14AIssue-wise Detailed Analysis:1. Unabsorbed Depreciation:The primary issue revolves around whether the unabsorbed depreciation from Assessment Years (AYs) 1997-98 to 1999-2000 can be carried forward and set off against income for AY 2008-09 and subsequent years. The Tribunal initially allowed the set-off, but the Revenue contested this, arguing that the eight-year limitation for carrying forward unabsorbed depreciation had expired. The Hon'ble High Court remitted this issue back to the Tribunal for reconsideration, emphasizing the need to consider the Supreme Court's decision in Peerless General Finance and Investment Co. Ltd. v. CIT (380 ITR 165).During the re-adjudication, the Tribunal noted that the Finance Act, 2001, amended Section 32(2) to allow unabsorbed depreciation to be carried forward indefinitely from AY 2002-03 onwards. The Tribunal referred to various judicial precedents, including the Gujarat High Court's decision in General Motors India (P) Ltd. v. DCIT (354 ITR 244), which supported the view that unabsorbed depreciation as of 01.04.2002 could be carried forward indefinitely. The Tribunal concluded that the unabsorbed depreciation from AYs 1997-98 to 1999-2000 could be carried forward and set off against income for AY 2008-09 and subsequent years.Furthermore, the Tribunal found that the decision in Peerless General Finance and Investment Co. Ltd. was not directly applicable to the present case, as it dealt with the head of income against which unabsorbed depreciation could be adjusted, rather than the period for which it could be carried forward. The Tribunal upheld the CIT(A)'s decision to allow the set-off of unabsorbed depreciation for AYs 1997-98 to 1999-2000 against income for AY 2008-09.2. Disallowance under Section 14A:The second issue pertains to the disallowance of expenditure under Section 14A of the Income Tax Act, which deals with expenses incurred in relation to earning exempt income. The Tribunal had previously directed the Assessing Officer (AO) to restrict the disallowance to the extent of exempt income earned by the assessee, following the Delhi High Court's decision in Joint Investments Private Limited v. CIT (372 ITR 694). Both the Revenue and the assessee appealed this decision.The Hon'ble High Court remitted this issue back to the Tribunal, highlighting the need for the AO to record objective satisfaction regarding the correctness of the assessee's claim of expenditure related to exempt income. The Tribunal noted that the AO had failed to record such satisfaction and had mechanically applied Rule 8D without proving any infirmity in the disallowance made by the assessee. The Tribunal emphasized that the application of Rule 8D is not automatic and must be preceded by the AO's objective satisfaction.The Tribunal referred to the Supreme Court's decision in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (394 ITR 449), which held that the AO must be satisfied with the correctness of the assessee's claim before applying Rule 8D. The Tribunal also cited various other judicial precedents supporting the view that disallowance under Section 14A cannot exceed the exempt income earned by the assessee and that investments yielding no exempt income should be excluded from the disallowance computation.The Tribunal directed the AO to record objective satisfaction regarding the sufficiency of the assessee's disallowance and, if satisfied, to apply Rule 8D subject to the Tribunal's observations. Additionally, the Tribunal held that disallowance under Section 14A could not be adjusted while computing Book Profits under Section 115JB, following the Special Bench decision in ACIT v. Vireet Investment (P) Ltd. (165 ITD 27) and the Karnataka High Court's decision in Sobha Developers Ltd. v. DCIT (125 Taxmann.com 72).Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The Tribunal directed the AO to re-examine the disallowance under Section 14A in light of the Tribunal's observations and judicial precedents.Order Pronounced on 21st January, 2022.