Depreciation on land cost disallowed under income tax law, section 14A expenses sustained for exempt income

ITAT Chennai upheld depreciation disallowance on land cost, confirming no legal provision permits such depreciation. The court sustained section 14A disallowance for expenses relating to exempt income but directed AO to verify if depreciation reversal was offered to tax in subsequent year. Investment write-offs were allowed following HC precedent. Income recognition additions for farmer security cards and rent due from staff quarters were sustained under mercantile accounting. Land lease deposit was held taxable on accrual basis. MAT computation was upheld with depreciation on land added back to book profit. Section 40(a)(ia) disallowance was remanded for verification of second proviso applicability. Interest on NPA classification for joint venture loans was rejected, sustaining additions.

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Issues Involved:

1. Disallowance of Depreciation on Land
2. Disallowance of Expenses Relatable to Earning Exempt Income under Section 14A
3. Disallowance of Investments Written Off
4. Assessment of Fringe Benefit
5. Revenue Recognition on Land Lease Deposit
6. Re-computation of Book Profit under Section 115JB

Summary of Judgment:

1. Disallowance of Depreciation on Land:
The assessee claimed depreciation on land and building at MHU Complex, CIT Nagar, Nandanam, Chennai. The Assessing Officer disallowed depreciation on land cost, as per the provisions of the Income-tax Act, 1961, which does not allow depreciation on land. The CIT(A) confirmed the disallowance. The Tribunal upheld the disallowance but directed the Assessing Officer to verify if the depreciation was reversed and offered to tax in the assessment year 2012-13, and if so, to exclude the income offered towards reversal of depreciation while computing the total income for that year.

2. Disallowance of Expenses Relatable to Earning Exempt Income under Section 14A:
The Assessing Officer disallowed expenses relatable to exempt income under Section 14A read with Rule 8D of the Income-tax Rules, 1962. The CIT(A) scaled down the disallowance to 2% of the exempt income. The Tribunal upheld the CIT(A)'s decision, stating that the Assessing Officer had recorded satisfaction regarding the disallowance, and the proportionate expenses should be disallowed by applying certain methods.

3. Disallowance of Investments Written Off:
The assessee wrote off investments in subsidiary and associate concerns amounting to Rs. 1,99,48,306/-. The Assessing Officer disallowed the write-off, treating it as a capital loss. The CIT(A) confirmed the disallowance. The Tribunal, following the decision of the Hon'ble Madras High Court in the assessee's own case, held that the write-off of diminution in the value of investment is allowable as revenue expenses/loss under Section 28 and 37(1) of the Act and directed the Assessing Officer to delete the disallowance.

4. Assessment of Fringe Benefit:
The Assessing Officer assessed the value of fringe benefits, including staff welfare expenses and traveling expenses. The CIT(A) partly allowed the appeal, directing the Assessing Officer to exclude certain amounts and verify the claim regarding traveling expenses. The Tribunal upheld the CIT(A)'s decision, stating that the assessee could not furnish evidence for certain expenses and directed the Assessing Officer to verify the claim regarding traveling expenses.

5. Revenue Recognition on Land Lease Deposit:
The assessee received land lease deposits for allotting land on long-term lease in SEZ. The Assessing Officer treated the entire lease deposit as income in the year of receipt, considering it as a transfer of land. The CIT(A) confirmed the addition. The Tribunal upheld the decision, stating that the lease transaction for 90/99 years amounts to a transfer, and the lease deposit should be recognized as income in the year of receipt, excluding the refundable 15% deposit.

6. Re-computation of Book Profit under Section 115JB:
The Assessing Officer re-computed the book profit by adding back the disallowed depreciation on land. The CIT(A) confirmed the re-computation. The Tribunal upheld the decision, stating that the disallowance of depreciation on land should be added back to the book profit computed under Section 115JB, as the assessee made an excessive claim of depreciation.

Conclusion:
The appeals for assessment years 2006-07 and 2008-09 were dismissed, while the appeals for assessment years 2007-08, 2011-12, 2012-13, and 2013-14 were partly allowed for statistical purposes.

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