2011 (3) TMI 426 - AT - Income Tax

Depreciation - Set off and carry forward of losses - The fact that it was paying the professional fees and running its branch office indicates that the assessee intended to continue in business and it can at best be considered as a mere lull in the business activity - When there is a business activity depreciation claimed by the assessee ought to have been allowed particularly when it is part of the block of the assets - the main contention of the assessee with regard to the claim of deduction towards depreciation was not properly considered and the alternative contention with regard to set off of brought forward losses and the further contention urged at this stage were also not considered by the tax authorities - Since the learned Counsel, appearing on behalf of the assessee, has raised various issues with regard to claim of depreciation and also the alternative contention as to the claim of set off of the brought forward business losses or the non-taxability of the income accrued in the form of exchange fluctuation - Decided in the favour of assessee by way of remand

Summary

Issues Involved:
1. Allowability of depreciation under section 32 of the Income Tax Act.
2. Set off of brought forward business losses and unabsorbed depreciation allowances.
3. Taxability of income arising from foreign exchange fluctuation.

Issue-wise Analysis:

1. Allowability of Depreciation under Section 32 of the Income Tax Act:
The primary issue in this case pertains to the allowability of depreciation under section 32 of the Income Tax Act. The assessee-company, a tax resident of Israel, had a branch office in Mumbai primarily engaged in the trading of rough diamonds. For the assessment year 2005-2006, the Assessing Officer disallowed the depreciation claim on the grounds that the business had discontinued, and the assets were not used for business purposes. The assessee argued that there was only a temporary lull in business activities and that the premises were maintained for business purposes, including statutory compliances and maintenance of accounts. The CIT(A) upheld the disallowance, citing the absence of expenses such as electricity, repair, water, and security charges, indicating that the building was not used for business purposes. The Tribunal noted that the Assessing Officer and CIT(A) had considered the issue from a limited angle and directed the Assessing Officer to reconsider the matter, taking into account the various issues raised by the assessee, including the continued payment of professional fees and the intention to carry on business.

2. Set Off of Brought Forward Business Losses and Unabsorbed Depreciation Allowances:
The assessee contended that the Assessing Officer failed to allow the set off of brought forward business losses and unabsorbed depreciation allowances of earlier years while computing the taxable total income. The CIT(A) did not address this ground. The Tribunal directed the Assessing Officer to reconsider this issue along with the main issue of depreciation, ensuring a comprehensive review of the assessee's claims.

3. Taxability of Income Arising from Foreign Exchange Fluctuation:
The assessee raised an additional ground regarding the taxability of income arising from foreign exchange fluctuation. It was argued that the Assessing Officer accepted the exchange fluctuation gain as business income while disallowing the depreciation claim, which was contradictory. The Tribunal acknowledged that this issue was connected to the claim of depreciation and directed the Assessing Officer to consider it during the reassessment process.

Conclusion:
The Tribunal set aside the issue to the file of the Assessing Officer with directions to reconsider the matter in accordance with the law, providing the assessee a reasonable opportunity of being heard. The appeal filed by the assessee was treated as allowed for statistical purposes.