2008 (11) TMI 275 - AT - Income Tax

Disallowance of depreciation - Option for claiming depreciation - Income form other sources or not - service charges realised for various services under corporate agreements relating to the commercial premises let out by it - Disallowance u/s 14A - notionally attributing interest expenses towards investment in shares and units - Claim for long-term and short-term capital loss reduced. Disallowance of depreciation - Option for claiming depreciation - CIT(A) held that option of not claiming depreciation was available only to an assessee who did not claim set off of unabsorbed depreciation of earlier years as forming part of or merged in the current depreciation - HELD THAT - We find that the decisions relied on by the CIT(A) for confirming the forced allowance of depreciation on the assessee are not relevant in the facts of this case. we find that High Court in the case of Sree Senhavalli Textiles (P) Ltd. 2002 (10) TMI 68 - MADRAS HIGH COURT held that Expln. 5 to s. 32(1) would apply only from 1st April 2002. Again In the case of CIT vs. Kerala Electric Lamp Works Ltd. 2003 (2) TMI 61 - KERALA HIGH COURT held that Expln. 5 to s. 32(1) having come into effect only from 1st April 2002 and assessee having not claimed depreciation for earlier years AO was not justified in thrusting such depreciation on the assessee - Ld DR was unable to point out any decision directly on the issue which went against the decisions of Hon ble Madras and Hon ble Kerala High Court. Therefore we are of the opinion that assessee has to succeed in its ground. AO is directed not to thrust the depreciation which was not claimed by the assessee for the impugned year. Income form other sources or not - service charges realised for various services under corporate agreements relating to the commercial premises let out by it - HELD THAT - We find from para 13 of the order of this Tribunal that similar grounds were dismissed by this Tribunal relying on the decision of SHAMBHU INVESTMENT P. LTD. VERSUS COMMISSIONER OF INCOME-TAX 2003 (1) TMI 99 - SC ORDER of the apex Court. Respectfully following this decision we dismiss ground No. 2 of the assessee. Disallowance u/s 14A - notionally attributing interest expenses towards investment in shares and units - According to the assessee there were no borrowings for making such investments and these were made out of internal accruals - HELD THAT - As for the decision in S.G. Investments Industries 2003 (5) TMI 198 - ITAT CALCUTTA-C interest was relatable to investments in shares for earning exempt dividend income. Here on the other hand assessee has been able to establish clearly that none of its loan funds were used for the purpose of such investments. For invoking s. 14A the first condition is that expenditure should be incurred by the assessee in relation to such income which does not form part of the total income - As long as no such expenditure is involved in our opinion there cannot be a disallowance u/s.14A. Therefore we delete the disallowance being the notionally attributed interest expense relatable to the investments in shares and units - the issue of the assessee therefore stands allowed. Claim for long-term and short-term capital loss reduced - HELD THAT - It is noteworthy that neither the AO nor CIT(A) has alleged that any colourable device was used by the assessee through these transactions so as to evade or for that matter avoid any taxes. None of the transactions were alleged to have been entered into a pre-planned manner without commercial objective. In fact M/s ZES who acquired M/s PGL was not a related party at all - Therefore in our opinion CIT(A) fell in error when he added Re. 1 consideration received by the assessee from M/s ZES to the sum infused by ZES into PGL as a part of the consideration for the equity shares transferred. In fact managing director of the ZES was examined by the AO of M/s ZES in relation to these transactions and in his report it was clearly stated that the sum paid to M/s Voltas Ltd. was by way of discharging the liability of M/s PGL. It was not anywhere stated that it was a part of the sale consideration received for selling the equity shares - Therefore we have no hesitation to set aside the order of CIT(A) and direct the AO to accept the long-term and short-term capital loss as computed by the assessee. Therefore ground No. 4 of the assessee stands allowed. Consequentially assessee s appeal is partly allowed.

Summary

Issues Involved:
1. Thrusting of depreciation under Section 32 of the IT Act.
2. Classification of service charges as 'Income from other sources' versus 'Income from house property'.
3. Disallowance under Section 14A for interest expenses attributed to investments in shares and units.
4. Treatment of loan refunds as part of sale consideration for shares, affecting capital loss claims.
5. Disallowance of compensation paid under VRS as revenue expenditure.

Issue-wise Detailed Analysis:

1. Thrusting of Depreciation under Section 32 of the IT Act:
- Facts: The assessee did not claim depreciation of Rs. 37,352,706 in its return, citing the Supreme Court decision in CIT vs. Mahendra Mills. The AO, however, thrusted the depreciation, arguing that post-amendment, the assessee had no option but to claim it.
- CIT(A) Decision: Supported the AO, relying on CIT vs. Mother India Refrigeration Industries (P) Ltd. and CIT vs. Andhra Cotton Mills Ltd.
- Tribunal's Decision: Held that the decisions cited by CIT(A) were not relevant. The Tribunal cited the Madras High Court decision in CIT vs. Sree Senhavalli Textiles (P) Ltd. and Kerala High Court in CIT vs. Kerala Electric Lamp Works Ltd., which held that Explanation 5 to Section 32(1) applies only from 1st April 2002. Directed AO not to thrust depreciation on the assessee.

2. Classification of Service Charges:
- Facts: Assessee treated service charges from commercial premises as 'Income from house property', while the AO classified it as 'Income from other sources'.
- Tribunal's Decision: Referred to its own previous decisions in the assessee's case for earlier years and the Supreme Court decision in Shambhu Investment (P) Ltd. vs. CIT. Dismissed the assessee's ground, confirming the AO's classification.

3. Disallowance under Section 14A:
- Facts: AO disallowed Rs. 76,15,000 by attributing interest expenses to investments in shares and units, despite the assessee's claim that these were funded by internal accruals.
- CIT(A) Decision: Upheld the AO's disallowance, citing Tribunal decisions in Dy. CIT vs. S.C. Investments & Industries Ltd. and Asstt. CIT vs. Dakshesh S. Shah.
- Tribunal's Decision: Found no evidence that borrowed funds were used for investments. Cited cash flow statements, terms of loans, and lack of auditor comments on non-compliance. Deleted the disallowance, ruling that Section 14A could not be invoked without incurred expenditure.

4. Treatment of Loan Refunds:
- Facts: Assessee claimed capital losses from the sale of shares in M/s PGL to M/s ZES, where the sale price was Re. 1. AO disallowed the claim, treating the transaction as non-genuine.
- CIT(A) Decision: Partly allowed the claim but included Rs. 540 lacs infused by ZES into PGL as part of the sale consideration.
- Tribunal's Decision: Held that the infusion of Rs. 540 lacs was a loan repayment to PGL, not part of the sale consideration. Directed AO to accept the capital loss claims as computed by the assessee.

5. Disallowance of VRS Compensation:
- Facts: AO disallowed Rs. 41,03,08,691 claimed as VRS compensation, treating it as capital expenditure.
- CIT(A) Decision: Deleted the disallowance, relying on the jurisdictional High Court decision in CIT vs. Bhor Industries Ltd.
- Tribunal's Decision: Agreed with CIT(A), noting that VRS payments are allowable as per various judicial precedents. Dismissed the Revenue's ground.

Conclusion:
The Tribunal allowed the assessee's claims regarding depreciation and capital losses, while dismissing the Revenue's appeal on VRS compensation. It upheld the AO's classification of service charges and disallowance under Section 14A, aligning with prior decisions and judicial precedents.