TMI Blog2014 (11) TMI 1204X X X X Extracts X X X X X X X X Extracts X X X X ..... r was to reduce the tax liability is also not correct. Further, the AO has also not ascertained the market value of a 10 to 15 years old generator set of similar capacity purchased by the assessee from Kirloskar Oil Engines Ltd. CIT(A) was not justified in upholding the action of the AO in invoking Explanation 3 to section 43(1). We accordingly set-aside the order of the CIT(A) on this issue and direct the AO to allow the depreciation as claimed by the assessee. Disallowance of commission paid to Non-Executive Director - as per DR since the assessee has not substantiated with evidence the services rendered by the non-executive directors, therefore, the CIT(A) was not justified in deleting the addition - HELD THAT:- The audited accounts of the assessee company show the meetings attended by the non-executive directors in the Board meeting as well as meetings of the Audit committee. Further, similar payments made in the past have not been disallowed. The payment of commission has also been approved by the Board of Directors and within the permissible limit of the Companies Act. No infirmity in the order of the Ld.CIT(A) deleting the disallowance being commission paid to non-execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the only interest element that can be attributable to the earning of dividend income which is tax free. He failed to appreciate fact that the amounts invested in the Mutual Funds are the surplus amount available with the company during the year and not from the borrowed funds. 2.1 Facts of the case, in brief, are that during the course of assessment proceedings the AO noted that the assessee has claimed the dividend income as exempt. From the various details furnished by the assessee, he observed that the assessee company has used his cash credit account towards purchase of shares, the dividend income of which has been claimed as exempt. The AO however noted that the term loan of the company and the other interest bearing funds have not been used for purchase of income exempt assets. Applying the provisions of section 14A r.w. Rule 8D, the AO disallowed an amount of ₹ 11,173/- to the total income of the assessee. 3. In appeal the Ld.CIT(A) upheld the action of the AO on the ground that there is a specific finding by the AO that the cash credit funds has been diverted for purchase of shares, the income of which has been claimed as exempt. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its power division during A.Y. 2008-09 and it was decided to dispose of all the generator sets. As a result, the assessee has to make alternate arrangements for its power needs. It was submitted that the cost of a new generator set is around ₹ 30.50 crores at that time which was not possible for the assessee company to buy. Further, duration of procurement and commissioning of a new generator set was about 10 months, therefore, it was decided to purchase the second hand generator set from Kirloskar Oil Engines Ltd. It was further submitted that both the companies are in 30% tax bracket and the transaction was carried out at Arms Length . 6. However, the AO was not satisfied with the explanation given by the assessee. According to him, the generators were 10 to 15 years old and originally the same was owned by Kirloskar Power Ltd., which was subsequently amalgamated with Kirloskar Oil Engines Ltd., which used to supply electricity from the generator supplied to the assessee company and other companies with the vicinity. The AO further held that since the main purpose of transfer of such generator set at higher than the WDV was to claim depreciation, provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hand generator set from Kirloskar Oil Engines Ltd., at a cost of ₹ 5,27,95,285/- although the WDV of the same was standing at ₹ 4,05,14,509/- in its books of account. He submitted that the AO invoking Explanation 3 to section 43(1) substituted the cost of Diesel Generator set at ₹ 4,05,14,509/-, thereby disallowing depreciation of ₹ 18,42,116/-. He submitted that the assessee, i.e. Kirloskar Ferrous Industries Ltd., and the seller Kirloskar Oil Engines Ltd. are listed public companies and are governed by SEBI Corporate Government norms. Both the companies have independent Board of Directors and the transactions are always at Arms Length Price . He submitted that the assessee would have incurred a cost of ₹ 30.50 crores for installation of new generator set. Further, that would have hampered the production schedule since the purchase of new generator set would have taken considerable time which in turn would have affected the production schedule. However, both the companies are under 30% tax bracket. Therefore, merely because these are group companies there was no need of invoking the provisions of Explanation 3 to section 43(1). He drew the attentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee before the lower authorities that the cost of new generator set was around ₹ 30.50 crores has not been disputed. 9.2 We also find force in the submission of the Ld. Counsel for the assessee that the cost of duration of the procurement and commissioning of a new generator set which is about 10 months would have affected the production schedule of the assessee company. The submission of the Ld. Counsel for the assessee before the lower authorities that both the companies are managed by separate Board of Directors has not been disputed. Since undisputedly both the companies which are listed public companies and are falling in the 30% tax bracket, therefore, the apprehension that such transfer was to reduce the tax liability is also not correct. Further, the AO has also not ascertained the market value of a 10 to 15 years old generator set of similar capacity purchased by the assessee from Kirloskar Oil Engines Ltd. Under these circumstances, we are of the considered opinion that the Ld.CIT(A) was not justified in upholding the action of the AO in invoking Explanation 3 to section 43(1). We accordingly set-aside the order of the Ld.CIT(A) on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ₹ 22 lakhs only which is much less than the allowable commission to be paid to the directors. 11.1 The Ld.CIT(A) allowed the claim of the assessee by observing as under : 12. I have carefully considered the facts of the case as well as reply of the appellant. In this case, the payment has been made to Non-Executive Directors for which no services have claimed to been rendered by them as per Assessing Officer. On the contrary, the appellant has submitted that the payment to Non-Executive Directors was calculated as per Sec. 309 of the Companies Act. It was also submitted that the learned Assessing Officer failed to appreciate the fact in proper prospective and similar claims in the hand of company were never disallowed in the past. In this regard, it must be appreciated that Non-Executive Directors are the Members of Board of Directors and they enjoy powers as delegated to them by the Board of Directors or vested in them by Articles of Association of the company. Further, the commission is approved by the Board of Directors as per Companies Act. In this case, as per Annual Report, commission to these Directors was allowable up to ₹ 64,74,648/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Orient Longman Pvt. Ltd., is concerned, he submitted that it was a private limited company whereas the assessee company is a listed public company and it is mandatory for the company to have specified number of non-executive directors who are required to head various committees. Therefore, the said decision is not applicable to the facts of the present case. 14. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The submission of the Ld. Counsel for the assessee that it is mandatory for listed public companies to have specified number of independent non-executive directors could not be controverted by the Ld. Departmental Representative. Therefore, the decision of the Hyderabad Bench of the Tribunal in the case of Orient Longman Pvt. Ltd., (Supra) is not applicable to the facts of the present case. The audited accounts of the assessee company show the meetings attended by the nonexecutive directors in the Board meeting as well as meetings of the Audit committee. Further, similar pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been followed by the Mumbai Bench of the Tribunal in the case of Weizmann Ltd. Vs. DCIT vide ITA No.5697/Mum/2008 order dated 07-02-2013. Following the above decisions, the Ld.CIT(A) allowed the claim of the assessee for which the Revenue is in appeal before us. 17. After hearing both the sides, we find the issue stands squarely covered in favour of the assessee by the decision of the Hon ble Gujarat High Court in the case of General Motors India Pvt. Ltd., Vs. DCIT vide Special Civil Application No.1773/2012 order dated 23-08-2012. We find the Hon ble High Court while deciding the issue has observed as under : 30. The last question which arises for consideration is that whether the unabsorbed depreciation pertaining to A.Y. 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by Section 32 as amended by Finance Act 2001? The reason given by the Assessing Officer under section 147 is that Section 32(2) of the Act was amended by Finance Act No.2 of 1996 w.e.f. A.Y. 1997-98 and the unabsorbed depreciation for the A.Y. 1997-98 could be carried forward up to the maximum period of 8 years from the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off shall be set off from the income under any other head, if any, assessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and Clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and- (a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed: Provided that the time limit of eight assessment years specified in sub clause (b) shall not apply in case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Company (Special Provisions) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or profession for any previous year, deduction of depreciation under section 32 shall be mandatory. 30.3 Under the existing provisions, no deduction for depreciation is allowed on any motor car manufactured outside India unless it is used (i) in the business of running it on hire for tourists, or (ii) outside in the assessee s business or profession in another country. 30.4 The Act has allowed depreciation allowance on all imported motor cars acquired on or after 1st April, 2001. 30.5 These amendments will take effect from the 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years. 37. The CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 upto the A.Y.2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. 17.1 Since the Ld.CIT(A) while deciding the issue in favour of the assessee has followed the decision of the Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X
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