2012 (10) TMI 49 - AT - Income Tax

Computation of depreciation u/s 32 Whether depreciation can be claim from the date of actual commencement of business or from the date of setting up of the business Assessee contended that place of business was ready by 30.09.2003 - First sale bill of the raised on date 01.01.2004 AO apply of 50% of the depreciation rate for half year Held that - Once business has been set up and ready to commence business, expenses have to be allowed irrespective of the fact that actual commencement of the business was much later. Therefore, the building was fully ready prior to 30.9.2003 and depreciation should be allowed at normal rate. We are however unable to accept the arguments that merely because the building was ready, the business had been set up. The assessee was setting up entertainment centre and, therefore, unless assessee was ready to provide any of the entertainment services, it cannot be said that place of business had been set up and the building was used for the purpose of business. It has not been examined whether these fitness machines were ready for use before 30.9.2003. No specific opportunity had been given to the assessee to prove whether any of the services in the entertainment centre were were ready before 30.9.2003. Case remand back to AO

Summary

Issues:
Disallowance of claim of depreciation of Rs.33,08,581.

Analysis:
The dispute revolves around the disallowance of depreciation claimed by the assessee amounting to Rs.33,08,581 for the assessment year 2004-05 concerning the entertainment center set up in Pune. The Assessing Officer (AO) disallowed 50% of the depreciation claimed by the assessee, asserting that the business activity of the entertainment center only started from 01.01.2004, despite the assets being acquired and used before that date. The AO contended that since various assets were purchased in the latter half of the year, depreciation should be allowed only at 50% of the normal rate. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the entertainment center was not fully set up before 30.9.2003, as claimed by the assessee. The CIT(A) noted that the building was purchased on 2.9.2003, and there was a lack of evidence to prove that the assets were ready for use before 30.9.2003.

The assessee challenged the decisions of the AO and CIT(A) before the Tribunal, arguing that the entertainment center was indeed ready for use before 30.9.2003. The assessee provided details of investments made prior to the specified date and highlighted that certain fitness machines were installed before 30.9.2003. The Tribunal examined the contentions of both parties and concluded that the crucial issue was whether the entertainment center was set up and ready for use before 30.9.2003. The Tribunal acknowledged the investments made by the assessee but emphasized that the mere readiness of the building did not necessarily imply that the business had been established. The Tribunal distinguished the case cited by the assessee and directed a fresh examination by the CIT(A) to determine if any services of the entertainment center were operational before 30.9.2003. The Tribunal set aside the CIT(A)'s order and remanded the matter for a detailed reevaluation, granting the assessee an opportunity to present further evidence.

In essence, the judgment delves into the timing of the establishment of the entertainment center and the eligibility for full depreciation based on the readiness of the business for operation. The Tribunal highlighted the need for concrete evidence regarding the operational status of the assets before a specific date, emphasizing that the mere acquisition and readiness of the building may not suffice to establish the commencement of business activities. The case underscores the importance of substantiating claims with detailed proof and the necessity for a thorough examination of factual circumstances before making determinations regarding depreciation allowances.