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Income Tax Appellate Tribunal, DELHI BENCH ‘A’ NEW DELHI
Before: SHRI SUNIL KUMAR YADAV & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
This is an appeal by the assessee against the order dated 27.05.2013 of ld. CIT(A)-III, New Delhi for the assessment year 2009-10 on the following grounds :
“1. That on the facts and in the circumstances of the case, the lower authorities erred in law disallowing Depreciation Allowance of Rs.4,28,653/- under rule 8D of the Income-tax Rules 1962 read with section 14A of the Income Tax Act (“Act”) without satisfying the nexus of Depreciation and dividend income earned.
2. That on the facts and in the circumstances of the case, the lower authorities erred in law in disallowing Depreciation allowance which does not have any direct and immediate connection with dividend
income of Rs.1,12,19,944/-. Depreciation allowance is not an expenditure incurred “in relation to “ dividend exempt income.
That on the facts it is contended that Depreciation is allowed with reference to cost of the eligible assets and is not dependent upon earning of taxable or non-taxable income.
4. The lower authorities erred on facts and in law in concluding that Depreciation is an “expenditure” debited to P&L account. It is contended that Depreciation is an allowance and an admissible deduction as per explanation 5 of section 32 to Act whether or not debited to P&L account and whether or not claimed by the appellant.
5. The lower authorities erred on facts and in law in disallowing bare minimum administrative expenses without establishing any relation to earn dividend income.”
All the above grounds relate to one issue regarding disallowance of depreciation of Rs.4,28,653/- , whether it should be considered as part of the expenditure incurred as stated in section 14A of the IT Act read with Rule 8D of the IT Rules, 1962.
3. The assessee company is carrying on the business of non-banking financial company which was registered with registrar of company as well as Reserve Bank of India. The main business of the assessee company was to make investments and to deal in shares and securities. The appellant filed its return of income declaring loss of Rs.6,65,26,661/-. The case was selected for scrutiny and statutory notices were issued to the assessee. Under the scrutiny proceedings, the Assessing Officer noted that the company has earned dividend income of Rs.1,12,19,944/- and has debited total expenditure of Rs.2,31,863/- comprising of Rs.1,25,000/- as salary to company secretary, Rs.1,05,761/- as administrative and other expenses, Rs. 1102/- as interest and financial charges. Out of the above sum, a sum of Rs.7384/- has been disallowed by the appellant itself in the computation of income towards security transaction tax. The appellant had also claimed a sum of Rs. 4,28,653/- towards depreciation on fixed assets. The assessee submitted before the Assessing Officer that he holds securities, shares as a promoter in U-FLEX LTD. and in a number of other unlisted companies, which were engaged in purely business activities. The equity shares of the above listed and unlisted companies were held for a number of years and it has been shown under the investment portfolio. The investment in equity shares were made not for the purpose of earning exempt income, but for having controlling interest in the listed and unlisted companies. These contentions were not accepted by the Assessing Officer and the Assessing Officer applying section 14A read with rule 8D made addition of Rs.6,53,131/-. Aggrieved by the order of the Assessing Officer, the appeal appealed before the first appellate authority. The first appellate authority accepted the contention of the assessee against disallowance of Rs.2,31,863/- stating that it was statutory expense which was necessary to run and maintain the company, but he did not give relief for depreciation disallowance of Rs.4,28,653/-. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before the Tribunal.
The ld. AR of the assessee submitted that the company was engaged in the business of NBFC and he had made investments in various companies for controlling interest, but not for the purpose of earning exempt income. The Assessing Officer has also not recorded satisfaction note before disallowing all the expenditure incurred. He has further submitted that the depreciation is not an expenditure incurred. It is an allowance which is mandatory to be allowed as per section 32 and Explanation-5 thereto. Interpreting the expenditure incurred as mentioned in section 14A(1), it was submitted that there must be actual expenditure and further interpreting the word “in relation to” submitted that the word “expenditure incurred” should be read in conjunction with the word “in relation to”. It means that there should be actual expenditure in relation to the exempted income. He also placed reliance on the following judgments before us :
(i). Vishnu Anant Mahajan vs. ACIT, 137 ITD (Ahd.)(SB) 22 (ii). Nectar Beverages P. Ld. Vs. DCIT, 314 ITR 314 (SC)
On the other hand, the ld. DR relied on the order of the authorities below.
After hearing both the parties and perusing the materials available on record before us, we find that the assessee has claimed depreciation allowance on fixed assets which was used for the purpose of business. The depreciation claimed on fixed assets is not an expenditure. It is notional expenditure which is computed as per section 32 of the IT Act for arriving at taxable income of the assessee in the relevant assessment year. For the sake of convenience the provisions of section 32(1) with Explanation 5 is reproduced as under :
(1) In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed— (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed31; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided that no deduction shall be allowed under this clause in respect of— (a) any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975 but before the 1st day of April, 2001, unless it is used— (i) in a business of running it on hire for tourists ; or (ii) outside India in his business or profession in another country; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42:
Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) [or the first proviso to clause (iia)], as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be : [Provided also that where an asset referred to in clause (iia)or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia)for that previous year, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia)shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset:] Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed. Explanation.—For the purposes of this proviso,— (a) the expression "commercial vehicle" means "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi-cab", "motor-cab", "tractor" and "road-roller"; (b) the expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor- cab", "tractor" and "road roller" shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988): Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991: Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv)of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;”
We further reproduce the provisions of section 14A which reads as under :
14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed19, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.
It is clear from the above sections that the depreciation is a notional expenditure which is provided on the fixed assets. The depreciation is not out of pocket cost. It has not been incurred during the assessment year. Section 14A clearly speaks about the expenditure incurred in relation to earning exempt income which do not form part of the total income. In the decision of ITAT, Ahmedabad Special Bench in the case of Vishnu Anant Mahajan (supra), relied by assessee, it has been held as under :
8. Coming to the question regarding depreciation being an expenditure or not, it has been held in the case of Hoshang D. Nanavati (supra) that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. The decision has been arrived at after considering the decision in the case of Nectar Beverages (P) Ld. Vs. Dy. CIT (2009) 314 ITR 314/182 Taxman 319 (SC). The ld. CIT(DR) has not been able to displace the ratio of these cases. Thus, on consideration, we find that section 14A uses the words “expenditure incurred by the assessee in relation to income . A statutory allowance under section 32 is not an expenditure. Therefore, we are in agreement with the decision of the Division Bench in the case of Hoshang D. Nanavati (supra).”
In view of the above decision, it is clear that the depreciation is a statutory allowance u/s. 32 and it is not expenditure in context to section 14A.
Respectfully following the above judgment, we allow the appeal of the assessee.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on16.11.2016