Disallowance u/s 14A capped, depreciation on infrastructure facility allowed, railway siding income qualifies u/s 80IA(4)(i)

ITAT Ahmedabad-AT dismissed the cross-appeals of assessee and Revenue, upholding the CIT(A)'s restriction of disallowance u/s 14A to 1% of the book value of mutual fund investments, holding the AO's higher disallowance excessive. The Tribunal allowed depreciation on "Infrastructure Usage Facility" as an intangible asset, following its own earlier decision in assessee's case and applying the principle that depreciation allowed in earlier years cannot be denied merely for alleged non-use in a subsequent year. It further held that income from operating and maintaining railway siding infrastructure under a sub-concession arrangement qualified for deduction u/s 80IA(4)(i), applying the proviso and recognizing assessee as a duly acknowledged transferee/contractor.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether and to what extent disallowance under Section 14A read with Rule 8D was warranted in respect of exempt dividend income from mutual funds for Assessment Year 2017-18.

1.2 Whether depreciation on intangible assets described as "Infrastructure Usage Facility" was allowable to the assessee where depreciation was also claimed by the lessor, for Assessment Year 2017-18.

1.3 Whether deduction under Section 80-IA(4)(i) was allowable in respect of income from operating and maintaining an infrastructure facility under a sub-concession arrangement for Assessment Years 2017-18 and 2018-19.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Disallowance under Section 14A read with Rule 8D - AY 2017-18

(a) Legal framework as discussed

2.1.1 The Tribunal noted the Assessing Officer's reliance on CBDT Circular No. 5 of 2014 and on Rule 8D(2)(iii), providing for a disallowance of 1% of the annual average of the monthly averages of investments when direct quantification of expenditure relatable to exempt income is not ascertainable. The Explanation to Section 14A, as referred to by the appellate authority, deems Section 14A applicable even if no exempt income has accrued, arisen or been received during the year, where expenditure has been incurred in relation to such income.

(b) Interpretation and reasoning

2.1.2 The Assessing Officer computed the annual average of monthly averages of total investments at Rs. 1,12,86,25,000/- and, applying Rule 8D(2)(iii), disallowed Rs. 1,12,86,250/- under Section 14A, without distinguishing between investments that yielded exempt income and those that did not. The assessee contended that investments were made out of sufficient free reserves and relied on earlier Tribunal decisions in its own case and on the decision of the jurisdictional High Court holding that where no exempt income is earned, no disallowance under Section 14A can be made.

2.1.3 The appellate authority found the Assessing Officer's factual assertion of a fresh investment of Rs. 70 crores in shares during the year to be incorrect and noted that no exempt income was earned from the shares held. The entire exempt income of Rs. 2,01,88,967/- was derived from mutual fund units. The aggregate investment in mutual funds during the year was Rs. 53,16,20,000/-, and the peak investment in such mutual funds was Rs. 24,00,00,000/-, with nil opening and closing balances. While accepting in principle that expenditure relatable to exempt income is to be disallowed in light of Section 14A and the CBDT Circular, the appellate authority, following the Tribunal's earlier decision in the assessee's own case, held that investments in shares which did not yield any exempt income during the year should be excluded from the basis of computation.

2.1.4 The appellate authority therefore restricted the disallowance to 1% of Rs. 24,00,00,000/- (being the book value / peak of mutual fund investments which yielded exempt income), i.e., Rs. 24,00,000/- and granted relief for the balance.

(c) Conclusions

2.1.5 The Tribunal upheld the appellate authority's approach and computation, holding that the disallowance should be confined to 1% of the relevant mutual fund investments that generated exempt income, and found no error in restricting the disallowance to Rs. 24,00,000/-. Both the assessee's challenge to the sustained disallowance and the Revenue's challenge to the reduction of the disallowance were dismissed.

2.2 Depreciation on Intangible Assets - "Infrastructure Usage Facility" - AY 2017-18

(a) Legal framework as discussed

2.2.1 The Tribunal referred to its own earlier orders in the assessee's case for prior years, where depreciation on "Infrastructure Usage Facility" treated as an intangible asset had been allowed from Assessment Year 2004-05 onwards. In those decisions, reliance was placed on the principle that where depreciation on a particular asset has been allowed in earlier years, the opening written down value cannot be disturbed in subsequent years merely because the Assessing Officer now disputes the claim. Judicial precedents cited in the earlier order included a decision of the jurisdictional High Court holding that depreciation allowed in earlier years could not be denied on the ground of non-use in a subsequent year, and a Tribunal decision holding that the Assessing Officer cannot re-open the accepted opening written down value of a block of assets.

(b) Interpretation and reasoning

2.2.2 The Revenue contended that depreciation was being claimed both by the assessee (lessee) and the lessor on the same asset, and hence the assessee's claim should be disallowed. The Tribunal noted that in earlier years it had already accepted that the assessee's right under the "Infrastructure Usage Facility" agreement constituted an intangible asset eligible for depreciation and that such claim had been continuously allowed since the year of acquisition. It also noted that in the earlier order the Tribunal had considered the nature of the right as a licence or right to use infrastructure facilities and had treated it as an intangible asset forming part of the block on which depreciation had been consistently granted.

2.2.3 The Tribunal observed that the Revenue had not brought on record any contrary decision, stay order, or change in factual or legal position that would justify a departure from the earlier years' findings in the assessee's own case.

(c) Conclusions

2.2.4 Respectfully following its own coordinate Bench decisions in the assessee's earlier assessment years, the Tribunal upheld the appellate authority's order allowing depreciation on the "Infrastructure Usage Facility" intangible asset for Assessment Year 2017-18. The Revenue's ground challenging the allowability of depreciation was dismissed.

2.3 Deduction under Section 80-IA(4)(i) - Sub-concession for Infrastructure Facility - AYs 2017-18 and 2018-19

(a) Legal framework as discussed

2.3.1 The Tribunal referred to its earlier decision in the assessee's own case for a prior year, where deduction under Section 80-IA(4) had been allowed in respect of income from operating and maintaining a container terminal infrastructure facility. In that decision, detailed reliance was placed on the proviso to Section 80-IA(4), which extends the benefit of deduction to a transferee or contractor, recognised by the concerned authority, who undertakes the development, or the operation and maintenance, or both, of an infrastructure facility, even where there is no direct agreement between such transferee and the specified authority.

2.3.2 The earlier decision, followed in the present years, had also relied on judgments of the High Court of Madras, which held that the proviso to Section 80-IA(4) allows deduction to an enterprise recognised as a contractor or transferee of a principal concessionaire for operating and maintaining an infrastructure facility, without requiring a direct contract with the Government or specified authority, so long as the conditions prescribed in the proviso are satisfied.

(b) Interpretation and reasoning

2.3.3 The Assessing Officer had denied deduction under Section 80-IA(4) on the ground that the conditions of Section 80-IA(4)(i)(b) were not satisfied, primarily because the assessee did not directly enter into an agreement with the Government or specified authority. The appellate authority, however, relying on the sub-concession agreement and earlier judicial precedents, held that the port infrastructure was developed by another entity and handed over to the assessee to operate and maintain the container terminal under a sub-concession that formed part of, and was in continuation of, the main concession agreement with the statutory authority.

2.3.4 In the earlier year's order, adopted in the present appeals, it was held that the assessee, being a recognised sub-concessionaire / contractor operating and maintaining an infrastructure facility, fell within the scope of the proviso to Section 80-IA(4) and was thus eligible for deduction, notwithstanding the absence of a direct contract with the Government or statutory authority.

2.3.5 In the present appeals, both sides accepted that the issue was covered by the Tribunal's decision in the assessee's favour for the earlier year. No distinguishing facts or contrary legal developments were pointed out by the Revenue.

(c) Conclusions

2.3.6 Following its own coordinate Bench decision in the assessee's earlier assessment year and applying the interpretation of the proviso to Section 80-IA(4) as laid down by the High Court of Madras, the Tribunal upheld the appellate authority's orders allowing deduction under Section 80-IA(4)(i) for Assessment Years 2017-18 and 2018-19. The Revenue's grounds challenging the allowability of deduction under Section 80-IA(4)(i) for both years were dismissed.

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