EASUN PRODUCTS OF INDIA PVT LTD.,CHENNAI vs. DCIT, CHENNAI

Both the appeals of the assessee are directed against the respective orders of the Commissioner of Income Tax (Appeals)-6, Chennai, dated 16.12.2015 and pertain to assessment years 2009- 10 and 2012-13. We heard both the appeals together and disposing of the same by this common order.

First let’s take appeal of the assessee for assessment year 2009-10. The only issue arises for consideration is disallowance of `76,02,493/-.

Shri M. Viswanathan, the Ld. representative for the assessee, submitted that the assessee has incurred expenditure to the extent of `76,02,493/- towards construction of compound wall, store room, underground sewage, design charges and temporary repairs to the building. The Assessing Officer, however, treated the expenditure as capital in nature and allowed depreciation at the rate of 10%. According to the Ld. representative, these are of temporary expenditure, therefore, the Assessing Officer has to allow the same as revenue expenditure. On a query from the Bench, how the construction of compound wall is treated as a temporary expenditure by the assessee? The Ld. representative submitted that it is not only a construction of compound wall, underground sewage drain was also constructed temporarily and temporary godown for keeping the cables was also constructed. Therefore, according to the Ld. representative, the assessee is entitled for allowance of entire amount as revenue expenditure.

On the contrary, Shri Supriyo Pal, the Ld. Departmental Representative, submitted that the assessee incurred expenditure on construction of compound wall, watch tower, godown, underground RCC drainage. These are all permanent structures for permanent use. The intention of the assessee is to use these infrastructures created on permanent basis. Even though the assessee claims that a temporary godown was constructed for keeping the cables, these are all permanent structures for keeping the cables permanently. Therefore, according to the Ld. D.R., the CIT(Appeals) has rightly confirmed the order of the Assessing Officer.

We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee incurred expenditure for construction of compound wall, watch tower, godown, underground drainage, etc. This Tribunal is of the considered opinion that the assessee has constructed compound wall, sewage drain, godown, etc. for permanent use in the business. It cannot be said that the infrastructures created by the assessee are for temporary use of the assessee. Therefore, the Assessing Officer has rightly treated the expenditure as capital in nature and allowed depreciation at the rate of 10%. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Now coming to the appeal for the assessment year 2012-13, the only issue arises for consideration is disallowance made by the Assessing Officer under Section 14A of the Income-tax Act, 1961 (in short 'the Act') read with Rule 8D of the Income-tax Rules, 1962.

Shri M. Viswanathan, the Ld. representative for the assessee, submitted that the Assessing Officer disallowed the expenditure under second and third limbs of Rule 8D(2). According to the Ld. representative, the Assessing Officer has to restrict himself only to the income earned by the assessee. Therefore, the disallowance made by the Assessing Officer beyond the income earned by the assessee is not justified.

We have heard Shri Supriyo Pal, the Ld. Departmental Representative also. The Assessing Officer after considering Section 14A of the Act and Rule 8D(2) of Income-tax Rules, 1962, found that there was no direct expenditure under first limb of Rule 8D(2). Referring to limb (ii) of Rule 8D(2), the Assessing Officer found that under Rule 8D(2), disallowance was made to the extent of `95,09,111/-. Referring to limb (iii) of Rule 8D(2), the Assessing Officer has taken 0.5% of average value of investment, income from which does not form part of total income. Ultimately, the Assessing Officer has taken average of both. For the purpose of limb (ii), the Assessing Officer has to compute the disallowance by following the method prescribed under Rule 8D(2)(ii). Similarly, for the purpose of limb (iii), the Assessing Officer has to take 0.5% of the average of value of investment which resulted in income which would not form part of total income. Therefore, for the purpose of limb (iii) alone, the disallowance cannot be extended beyond the income which does not form part of total income. Rule 8D(2) provides disallowance of average of all the three limbs therein. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

In the result, both the appeals of the assessee are dismissed.