2003 (6) TMI 465 - AT - Income Tax

Issues Involved:
1. Sustenance of addition on account of investment.
2. Depreciation on electric installations.
3. Depreciation on preoperative expenses.
4. Depreciation on plant and machinery valued below Rs. 5,000.
5. Investment allowance on specific items.
6. Allowance of loss and undervaluation of closing stock.
7. Deletion of addition on account of unexplained share application money.

Issue-wise Analysis:

1. Sustenance of Addition on Account of Investment:
The first issue was the sustenance of an addition of Rs. 20,000 made by the Assessing Officer (AO) regarding an investment by Shri Vinay Arora. The AO made the addition due to the lack of confirmation about the source, genuineness, or capacity of the creditor. The CIT(A) upheld this addition. The assessee argued that this was the first year of business and provided a confirmation letter from Shri Arun Arora on behalf of Shri Vinay Arora. The Tribunal concluded that the assessee had discharged its burden by requesting the AO to summon the creditor directly, thus the addition was not justified. The Tribunal deleted the addition of Rs. 20,000.

2. Depreciation on Electric Installations:
The second issue was the classification of electric installations worth Rs. 5,51,983. The AO treated these as part of the factory building, allowing depreciation at the rates applicable to buildings. The CIT(A) upheld this view. The assessee contended that electric installations should be considered part of plant and machinery. The Tribunal, citing various precedents, held that electric installations were indeed part of plant and machinery and directed the AO to allow depreciation at the rate applicable to plant and machinery.

3. Depreciation on Preoperative Expenses:
The third issue was the disallowance of depreciation on preoperative expenses amounting to Rs. 1,68,619 and Rs. 83,052. The CIT(A) held that these expenses could not be capitalized. The assessee argued that these expenses should be included in the cost of plant and machinery. The Tribunal found that the assessee failed to show that these expenses related to the acquisition of assets or plant and machinery, thus upheld the disallowance of depreciation on preoperative expenses.

4. Depreciation on Plant and Machinery Valued Below Rs. 5,000:
The fourth issue concerned the disallowance of 100% depreciation on plant and machinery valued at Rs. 59,085. The CIT(A) directed normal depreciation instead. The assessee argued that each item cost less than Rs. 5,000, thus qualifying for 100% depreciation. The Tribunal remanded the matter back to the AO to verify the cost of each item and decide the claim accordingly.

5. Investment Allowance on Specific Items:
The fifth issue was the disallowance of investment allowance of Rs. 2,11,982 on certain items. The CIT(A) upheld the AO's decision. The Tribunal noted that the items were used for business purposes and directed that the investment allowance be granted.

6. Allowance of Loss and Undervaluation of Closing Stock:
The sixth issue was the disallowance of a loss of Rs. 58,123 claimed by the assessee, which included Rs. 14,315 of depreciation. The AO disallowed the loss, citing undervaluation of closing stock. The CIT(A) allowed the loss, noting that the AO's valuation basis lacked justification. The Tribunal upheld the CIT(A)'s decision, recognizing the first year of the assessee's manufacturing activity and the minimal sales.

7. Deletion of Addition on Account of Unexplained Share Application Money:
The final issue was the addition of Rs. 3,17,000 due to unexplained share application money. The CIT(A) deleted Rs. 2,97,000 of this addition, accepting the genuineness of the investments except for Rs. 20,000 by Vinay Arora. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had proved the identity of the investors and the genuineness of the transactions, following the precedent set by the Supreme Court in CIT v. Stellar Investment Ltd.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, providing relief on several grounds including the deletion of additions and granting of depreciation and investment allowances as claimed by the assessee.

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