2014 (8) TMI 1131 - AT - Income Tax

Reopening of assessment u/s.147 - disallowance of claim of depreciation in respect of its cement factory at Gujarat - days of use of asset - Held that - No justification on the part of the lower authorities for decline of the claim of depreciation when the fact of assessee having used the machinery for trial run was not declined by any of the lower authorities. Even use of machine for one day will entitled the assessee for claim of depreciation. Since it is not clear from the record as to the period for which machinery was actually used by assessee we direct the AO to verify the period of used and restrict the claim of depreciation to 50% if he finds that machinery was used for less than 180 days during the year under consideration. Computation of book profit u/s.115JA - provision made for ECC jobs was directed to be reduced from book profit on the plea that it was ascertained liability - Held that - While working the book profit u/s.115JA the AO has added the provision for ECC jobs. We also found that the provision made for ECC jobs was for ascertained liability which was also added by the assessee in the valuation of work-inprogress. Thus effectively it was not an item of profit and loss account but was an item of trading account insofar as it was also added in work-in-progress forming the part of trading account. We found that similar additions made in the A.Y.1988-89 was also deleted by the Tribunal in assessee s own case. Accordingly we do not find any infirmity in the order of CIT(A) for deleting the addition made on account of provision for ECC jobs.

Summary

Issues:
1. Reopening of assessment under section 147
2. Disallowance of claim of depreciation in respect of cement factory machinery

Analysis:

Reopening of Assessment under Section 147:
The cross appeals were filed by the assessee and revenue against the order of CIT(A) for the assessment year 1997-98. The assessee contested the reopening of assessment under section 147 and the disallowance of depreciation claim for its cement factory machinery in Gujarat. The Assessing Officer (AO) disallowed the depreciation claim of Rs. 34,79,40,576, stating that the trial production of clinker was minimal and the commercial production was not initiated within a reasonable time. The CIT(A) upheld the disallowance, emphasizing the need for actual, effective, and real use of assets for depreciation claims. However, the ITAT Mumbai found that the machinery was indeed used for trial production, which is essential for the business of manufacturing clinker. Citing judicial precedents, the tribunal held that even trial production falls under "used for the purpose of business" and directed the AO to verify the period of use for depreciation calculation.

Disallowance of Depreciation Claim:
The CIT(A) confirmed the AO's action of disallowing the depreciation claim, citing a substantial gap between trial runs and commercial production. However, the ITAT Mumbai disagreed with this reasoning, noting that trial production is a valid use of machinery for business purposes. Referring to judicial decisions, the tribunal emphasized that even a short duration of machinery use qualifies for depreciation benefits. The tribunal directed the AO to verify the actual period of use and restrict the depreciation claim to 50% if the machinery was used for less than 180 days during the relevant year. The tribunal also found no fault in the CIT(A)'s decision to delete the addition made on account of provision for ECC jobs while computing the book profit under section 115JA. The provision for ECC jobs was considered an ascertained liability and not an item of profit and loss account.

Conclusion:
The ITAT Mumbai partially allowed the assessee's appeal and dismissed the revenue's appeal. The tribunal upheld the depreciation claim for machinery used in trial production and supported the deletion of the addition related to provision for ECC jobs in the book profit calculation. The ground regarding the reopening of the assessment order was not pressed and was dismissed.