Depreciation denied on land development but allowed on leasehold rights; section 14A restricted under rule 8D

ITAT Ahmedabad ruled on multiple issues in this tax appeal. The court dismissed the assessee's depreciation claim on land development expenditure, holding that since the assessee failed to challenge the initial disallowance in AY 2011-12, the matter reached finality and cannot be re-agitated. However, depreciation on right to use leasehold land was allowed as it qualified as intangible asset. Regarding section 14A disallowances, administrative expenses were restricted to Rs. 20 lacs under rule 8D, with Rs. 25 lacs added to book profit under section 115JB. The tribunal confirmed corporate guarantee as international transaction requiring benchmarking but found no adjustment warranted. For interest-free loans to foreign subsidiary, the court held LIBOR + 2.8% as arm's length price, deleting the upward adjustment.

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Issues Involved:

1. Disallowance of Depreciation on Land Development Expenditure
2. Disallowance of Depreciation on "Right to Use Leasehold Land"
3. Disallowance under Section 14A of the Income Tax Act
4. Deduction under Section 80IAB on Sale of Scrap
5. Deduction under Section 80IAB on Gain from Foreign Currency Derivative Transactions
6. Treatment of Foreign Currency Derivative Loss
7. Transfer Pricing Adjustment on Corporate Guarantee
8. Upward Adjustment in Transfer Pricing on Account of Interest

Summary:

1. Disallowance of Depreciation on Land Development Expenditure:
The assessee claimed depreciation on land development expenditure incurred on leasehold property. The AO disallowed this claim, stating that the expenditure could not be amortized under Section 35D of the Act. The CIT(A) upheld this disallowance, and the Tribunal agreed, noting that the assessee had not challenged the initial disallowance in earlier years, making it final. Thus, the ground of appeal was dismissed.

2. Disallowance of Depreciation on "Right to Use Leasehold Land":
The assessee claimed depreciation on the right to use leasehold land, treating it as an intangible asset. The AO disallowed this, stating that land property is not eligible for depreciation under Section 32 of the Act. The CIT(A) upheld this disallowance. However, the Tribunal set aside the CIT(A)'s order, directing the AO to allow the depreciation claim, following the Tribunal's earlier decision in the assessee's favor for AY 2011-12.

3. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed expenses under Section 14A related to exempt income, applying Rule 8D. The CIT(A) restricted the disallowance to the extent of exempt income and directed the AO to adjust eligible profits under Section 80IAB. The Tribunal upheld the CIT(A)'s decision, stating that interest-free funds exceeded investments, and only those investments yielding exempt income should be considered for administrative expenses disallowance.

4. Deduction under Section 80IAB on Sale of Scrap:
The AO disallowed the deduction on scrap sale proceeds, stating it was not derived from eligible industrial undertakings. The CIT(A) allowed the deduction, following the Tribunal's earlier decision in the assessee's favor for AY 2011-12. The Tribunal upheld this decision, finding no distinguishing facts for the current year.

5. Deduction under Section 80IAB on Gain from Foreign Currency Derivative Transactions:
The AO disallowed the deduction on gains from foreign currency derivatives, stating they were not derived from SEZ activities. The CIT(A) allowed the deduction, following the Tribunal's decision in the assessee's favor for AY 2011-12. The Tribunal upheld this decision, noting no distinguishing facts for the current year.

6. Treatment of Foreign Currency Derivative Loss:
The AO treated the derivative loss as speculative and not eligible for business loss deduction. The CIT(A) allowed the deduction, stating the transactions were for hedging purposes and not speculative. The Tribunal upheld this decision, following the Tribunal's earlier decision in the assessee's favor for AY 2011-12.

7. Transfer Pricing Adjustment on Corporate Guarantee:
The AO made an upward adjustment for not charging a guarantee commission on corporate guarantees provided to AE. The CIT(A) deleted the adjustment, stating no cost was incurred by the assessee for providing the guarantee. The Tribunal upheld this decision, noting that the corporate guarantee is not an international transaction requiring benchmarking.

8. Upward Adjustment in Transfer Pricing on Account of Interest:
The AO made an upward adjustment on interest-free loans provided to AE, benchmarking the interest at LIBOR + 370.7 basis points. The CIT(A) upheld this adjustment. However, the Tribunal set aside this decision, directing the AO to delete the adjustment, following the Tribunal's earlier decision in favor of the assessee, benchmarking the interest at LIBOR + 2%.

Conclusion:
The Tribunal's decisions were largely consistent with its earlier rulings in favor of the assessee, except for the disallowance of depreciation on land development expenditure, which was upheld against the assessee. The Tribunal emphasized the importance of following precedents and maintaining consistency in judicial decisions.

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