Depreciation on capitalised moulds and tools, plus full freezer cost, follows when refundable deposits are not cost reimbursements.
Depreciation is allowable on moulds and tools where expenditure initially claimed as revenue is capitalised and no depreciation has previously been allowed on that cost. Interest-related disallowance against exempt income is unwarranted where own funds exceed the investments generating exempt income, as borrowed funds cannot be presumed to have financed those investments. Refundable distributor deposits do not reduce the actual cost of freezers for depreciation because they are neither reimbursements of the asset cost nor subsidies. Accordingly, depreciation applies to the capitalised moulds and tools and the full freezer cost, without an exempt-income interest disallowance.
Issues: (i) Whether depreciation was allowable on the cost of moulds and tools treated as capital expenditure; (ii) Whether disallowance under section 14A was sustainable where own funds exceeded investments yielding exempt income; (iii) Whether refundable distributor deposits could be reduced from the actual cost of freezers for allowing depreciation.
Issue (i): Whether depreciation was allowable on the cost of moulds and tools treated as capital expenditure.
Analysis: The expenditure on moulds and tools, originally claimed as revenue expenditure, had been treated as capital in nature. The depreciation claim related to that capitalised cost and had not already been allowed.
Conclusion: Depreciation on moulds and tools amounting to Rs. 2,11,123 was directed to be allowed, in favour of the assessee.
Issue (ii): Whether disallowance under section 14A was sustainable where own funds exceeded investments yielding exempt income.
Analysis: Where own funds far exceed the investments yielding exempt income, no presumption that borrowed funds were used for such investments arises. Accordingly, an interest-related exempt-income disallowance was unwarranted.
Conclusion: The disallowance under section 14A was deleted, in favour of the assessee.
Issue (iii): Whether refundable distributor deposits could be reduced from the actual cost of freezers for allowing depreciation.
Analysis: The distributor deposits were refundable and were neither reimbursement of freezer cost nor subsidy. Therefore, they did not affect the actual cost of the freezers under the explanation to section 43(1).
Conclusion: Refundable distributor deposits could not be reduced from the cost of freezers for depreciation, in favour of the assessee.
Final Conclusion: The assessee is entitled to depreciation on the moulds, tools and full cost of freezers, and to deletion of the exempt-income disallowance.
Ratio Decidendi: Where an assessee's own funds exceed investments yielding exempt income, disallowance of interest expenditure under section 14A is unwarranted.