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Facts
The assessee, Air India Limited, filed its return of income declaring a loss. The Assessing Officer (AO) noted that the assessee received exempt income from dividends and disallowed expenses under Section 14A read with Rule 8D. The assessee also claimed depreciation, but filed a revised return for a higher amount, which the AO did not consider.
Held
The Tribunal held that the disallowance under Section 14A should be computed based on the average value of investments, not market value, and directed the AO to restrict the disallowance accordingly. Regarding depreciation, the Tribunal restored the issue to the AO to verify the claim of enhanced depreciation, stating that the restrictions on accepting revised claims do not apply to appellate authorities.
Key Issues
Whether disallowance of expenses for earning exempt income under Section 14A should be based on market value or average value of investments. Whether a claim for enhanced depreciation made through a revised return, not filed within the prescribed time limit, can be considered by appellate authorities.
Sections Cited
14A, Rule 8D, 32
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, VP & SMT RENU JAUHRI, AM
O R D E R Per Saktijit Dey, VP:
The captioned appeal by the assessee, arises out of the order dated 23.09.2024, passed by the National Faceless Appeal Centre (NFAC), Delhi, pertaining to assessment year (A.Y.) 2020-21.
At the outset, ld. counsel appearing for the assessee, on instructions, submitted that ground nos. 1.1 and 1.2 are not to be pressed. In view of the above, these grounds are dismissed as not pressed.
In ground nos. 2.1 and 2.2, the dispute relates to disallowance of an amount of Rs.68,22,862/-, u/s. 14A read with Rule 8D. assessment year under dispute, originally, the assessee filed its return of income on 15.02.2021. Thereafter, the assessee filed a revised return of income on 31.03.2021, declaring loss, both under the head ‘business’ as well as ‘capital gain’.
In course of assessment proceeding, the Assessing Officer (AO) noticed that, in the year under consideration, the assessee had received exempt income, by way of dividend, amounting to Rs.4,58,77,493/-. Whereas, the assessee has not made any suo motu disallowance of expense attributable to the earning of exempt income. He, therefore, called upon the assessee to explain as to why disallowance should not be computed under Rule 8D r.w.s. 14A of the Act. In reply, the assessee submitted that, the investments are in the nature of strategic investments and had been made out of its own funds. Therefore, the assessee had not incurred any expense for earning the income. The A.O. however, was not convinced with the submissions of the assessee.
He observed that the investment decisions are complex in nature, hence, require substantial market research, day-to-day analysis and decisions with regard to acquisition, retention, holding period and sale of shares and investments, at the most appropriate time. Therefore, it is not acceptable that exempt income can be earned without incurring any expenditure. With the aforesaid observations, the A.O. proceeded to compute the disallowance, by applying the methodology provided under Rule 8D.
While doing so, he made a disallowance of Rs.68,22,862/- under Rule 8D(2)(ii).
Though, the assessee contested the afore-said disallowance before learned first appellate authority, however, it was unsuccessful. disallowance under Rule 8D(2)(ii), the A.O. has made a fundamental computation error, by computing the disallowance based on the market value of the investments, as against the average value of investment as per the opening and closing balance. He submitted, the average value of the investment as per opening and closing balance, would work out to Rs.66,11,81,530/- and 1% of such amount, would work out to Rs.66,11,815/-, as against the amount of Rs.68,22,862/-, disallowed by the A.O. Thus, in sum and substance, he submitted that the disallowance should be restricted to Rs.66,11,815/-.
The ld. Counsel submitted, that investments made on two companies, viz. Air India Sats Airport Services Pvt. Ltd. (‘AISATS’) and Cochin International Airport Ltd. (‘CIAL’), have yielded exempt income. He submitted, even the A.O. has accepted the afore-said factual position. To demonstrate the aforesaid fact, ld. Counsel drew our attention to the decision of the co-ordinate bench in assessee’s own case in A.Y. 2017-18, vide dated 18.12.2024.
The learned Departmental Representative ('ld. DR' for short), strongly relied upon the observations of the A.O. and learned first appellate authority.
We have considered rival submissions and perused the materials on record.
Though, in course of proceeding before the departmental authorities, the assessee had taken a stand that no disallowance u/s. 14A read with Rule 8D is called for, however, before us, the assessee’s limited grievance is to the effect that disallowance under Rule 8D(2)(ii) r.w.s. 14A, should be made on the average value of investments, yielding exempt income during the year. It is the say of the assessee that such investment actually investment based on market value. We find substantial merit in the submissions of the assessee. On a perusal of the facts on record, as well as, the order of the co-ordinate bench in assessee’s own case in A.Y. 2017-18 (supra), it is observed that the average value of investments, giving rise to exempt income during the year under consideration works out to Rs.66,11,81,530/-. Therefore, in terms of Rule 8D(2)(ii), the disallowance @ 1% would work out to Rs.66,11,815/-. That being the case, we direct the A.O. to restrict the disallowance to Rs.66,11,815/-. Grounds are partly allowed.
In ground nos. 3.1 and 3.2, the assessee has contested disallowance of depreciation claimed, amounting to Rs.1,27,15,826/-. Briefly, the facts are, in the return of income filed for the assessment year under dispute, the assessee had claimed depreciation for a lesser amount. Subsequently, when this fact came to the notice of the assessee, it filed a revised return of income in course of assessment proceedings claiming excess depreciation of Rs.1,27,15,826/-. While completing the assessment, the A.O. did not take cognizance of the revised return of income. The assessee contested the issue before learned first appellate authority. Referring to the decision of Hon'ble Supreme Court, in case of Goetze (India) Ltd. vs. CIT 157 Taxman 1 (SC), learned first appellate authority upheld the disallowance, while observing that a claim not made through a valid revised return of income, cannot be entertained.
Before us, ld. Counsel appearing for the assessee submitted that as per the provisions of section 32 of the Act, irrespective of the claim made by the assessee, the A.O. has to compute depreciation available to the assessee. Thus, he submitted, whether the A.O. has to compute the depreciation correctly. Without prejudice, ld. Counsel submitted, as per the ratio laid down by the Hon'ble Supreme Court in case of Goetze (India) Ltd. (supra), the restrictions is only on the A.O. in accepting a revised claim other than through a revised return of income. However, this principle does not apply to appellate authorities. In support of such contention, ld. Counsel relied upon the decision of Hon'ble Jurisdictional High Court in case of CIT vs. Prithvi Brokers and Shareholders [2012] 23 taxmann.com 23 (Mum). Thus, he submitted, assessee’s revised claim may be admitted and the issue may be restored back to the A.O. for factual verification.
The ld. DR, strongly relied upon the observations of the A.O. and learned first appellate authority.
We have considered rival submissions and perused the materials on record.
Undisputedly, in course of assessment proceedings, the assessee through a manually filed revised return of income, had claimed depreciation at a higher figure. However, since the said revised return was not filed within the prescribed time limit, the A.O. did not entertain the claim. Whereas, learned first appellate authority upheld the disallowance of revised claim, since, it was not made through a valid revised return of income. While doing so, he has referred to the decision of the Hon'ble Supreme Court in case of Goetze (India) Ltd. (supra). In our view, though, as per the ratio laid down in case of Goetze (India) Ltd. (supra), the A.O. can entertain a revised claim, if it is made through a valid revised return of income, however, such restriction imposed on the the Hon'ble Jurisdictional High Court in case of Prithvi Brokers and Shareholders (supra). In any case of the matter, the revised claim by the assessee relates to depreciation. As per Explanation 5 to section 32(1) of the Act, the A.O. has to compute depreciation in terms with the provisions of the Act, rules and in consonance with the rate provided in the schedule of depreciation. In other words, irrespective of the claim made by the assessee, the A.O. has to compute depreciation, in accordance with the provisions of the Act and rules. Therefore, even if the assessee might have computed depreciation incorrectly, duty is cast upon the A.O. to correctly compute the depreciation. Therefore, if the assessee claims that the depreciation computed by it in the original return of income is incorrect, such claim needs to be factually verified. In the aforesaid facts and circumstances, we restore the issue to the A.O. with a direction to factually verify assessee’s claim of enhanced depreciation and compute depreciation, in accordance with the statutory provisions. Ground is allowed for statistical purposes.
In the result, the appeal is partly allowed.
Order pronounced in the open court on 06.01.2025 Sd/- Sd/- (Renu Jauhri) (Saktijit Dey) Accountant Member Vice President Mumbai; Dated : 06.01.2025 Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,