2011 (4) TMI 505 - HC - Income Tax

Addition - Rent undercharged - The lease agreement produced by the assessee showed that the location of the company was far away from any industrial estate. The AO failed to consider the market rent and did not make a comparison with other instances, for arriving at a notional rent, taking an ad-hoc 10% of the value of rent etc - The findings recorded by the learned Commissioner (A) have not been successfully challenged by the Department - Therefore,addition on account of rent undercharged by the assessee from its sister concern was rightly deleted by the CIT(A) and the Tribunal - It is, as such, upheld. Depreciation - building - Held that the assessee entitled for depreciation for whole year - Doi not find any error in the finding of facts recorded by the learned Commissioner (A) - The ground raised by the Department in this regard in view of the aforesaid first certificate dated 20.9.1995 issued by the Architects of the assessee and the unrebutted material brought on record by the assessee before the authorities, does not have any force. It is, therefore, rejected Depreciation -plant and machinery - Plant and machinery were put to use before 30.9.1995 -no production had actually taken place till 26.9.1995 and that production was yet to commence - there was absence of evidence of installation and use of machinery before 30.9.1995 - The AO thus restricted the claim of the assessee for depreciation @ 25% on the additions of Rs.5,28,39,089/- to 12.5% - Thus, a sum of Rs.66,04,886/- was disallowed out of depreciation claimed on additions to plant and machinery before 30.9.1995. Allowance -Interest - The Tribunal has specifically recorded that the amount was invested by the assessee as share application money with the sister concern, i.e., M/s Mark Exhaust Systems Ltd. and the department had failed to produce any evidence that there was diversion of borrowed funds on which interest had been paid by the assessee - Decided in favour of assessee.

Summary

Issues Involved:

1. Addition on account of rent undercharged by the assessee from its sister concern.
2. Entitlement to depreciation for the full year on the building.
3. Restriction of depreciation on plant and machinery to 50%.
4. Deduction of interest paid on money advanced to its sister concern free of interest.

Issue-wise Detailed Analysis:

(A) Addition on Account of Rent Undercharged:

The CIT(A) accepted the assessee's plea that the company's location in village Begumpur Khatola lacked industrial estate facilities, including electricity. The Assessing Officer (AO) did not refer to comparable cases when determining notional rent. The Tribunal affirmed this finding, noting that the AO's calculation of notional rent based on an ad-hoc 10% of the building's value was not substantiated by market rent comparisons. The Tribunal upheld the CIT(A)'s decision, concluding that the Department failed to challenge the findings effectively.

(B) Entitlement to Depreciation for the Full Year on the Building:

The CIT(A) concluded that the building was ready and put to use before 30.9.1995, entitling the assessee to full-year depreciation. The Tribunal affirmed this, highlighting that the AO ignored a certificate dated 20.9.1995 from the assessee's architects, which confirmed substantial completion of the building. The Tribunal found that the AO's reliance solely on a subsequent certificate dated 25.3.1996 was a misappreciation of evidence. The Tribunal noted that commercial production began on 26.6.1995, indicating the building's readiness and use before 30.9.1995.

(C) Restriction of Depreciation on Plant and Machinery to 50%:

The Tribunal affirmed the CIT(A)'s finding that the plant and machinery were put to use before 30.9.1995, entitling the assessee to full-year depreciation. The Tribunal noted that the AO's conclusion was based on the absence of corroborative evidence for the start of production before 30.9.1995. However, the CIT(A) considered various documents, including customs clearance records, installation certificates, and production commencement notices, which supported the assessee's claim. The Tribunal found no error in the CIT(A)'s appreciation of this evidence.

(D) Deduction of Interest Paid on Money Advanced to Sister Concern:

The Tribunal recorded that the amount invested by the assessee was as share application money with its sister concern, M/s Mark Exhaust Systems Ltd. The Department failed to produce evidence of diversion of borrowed funds on which interest was paid by the assessee. The Tribunal relied on its decision in the assessee's case for the previous assessment year, where it was found that specific borrowings were used for acquiring specific machinery. The Tribunal upheld the CIT(A)'s deletion of the disallowance, finding no basis for the Department's claim.

Conclusion:

The High Court found no merit in the revenue's appeals, noting that the findings of the CIT(A) and the Tribunal were based on proper appreciation of evidence and were not perverse or erroneous. The appeals were dismissed accordingly.