2011 (12) TMI 718 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance u/s 35(1)(iv) for capital expenditure on machinery not used during the year.
2. Allowance of depreciation on machinery and building of the Food Division.

Summary:

Issue 1: Deletion of Disallowance u/s 35(1)(iv)
The Revenue appealed against the deletion of disallowance amounting to Rs. 45,50,025/- made by the Assessing Officer (AO) u/s 35(1)(iv) of the I.T. Act, 1961. The AO observed that the assessee did not carry out business of the Food Division during the accounting period, as evidenced by the lack of reference to production and profit from the Food Division in the profit and loss account and raw-material consumption details. The AO concluded that the business had not commenced and disallowed the deduction. The CIT(A) accepted the assessee's claim based on a certificate from the Commercial Tax Department and VAT returns, holding that the business commenced during the period under consideration. However, the Tribunal found that the evidence provided by the assessee was insufficient and contradictory, noting that the entire quantity of raw-materials purchased was shown as sold, which is highly improbable in a production industry. The Tribunal concluded that the business had not commenced and upheld the AO's disallowance.

Issue 2: Allowance of Depreciation on Machinery and Building of Food Division
The Revenue also contested the allowance of depreciation amounting to Rs. 29,29,610/- on machinery and Rs. 5,63,110/- on the building of the Food Division. The AO disallowed the depreciation on the grounds that the business had not commenced. The CIT(A) allowed the depreciation, accepting the assessee's claim that the machinery was used for research and production started on 25.3.2008. The Tribunal, however, found that the evidence provided did not substantiate the commencement of production before the end of the financial year. The Tribunal noted that the Commercial Tax Department's certificate was based on the assessee's submission without physical verification. The Tribunal concluded that the business had not commenced, and therefore, depreciation could not be allowed. The Tribunal set aside the CIT(A)'s order and restored the AO's decision.

Conclusion:
The Tribunal allowed the Revenue's appeal, concluding that the assessee had not commenced the business of the Food Division during the accounting period, and therefore, disallowance u/s 35(1)(iv) and depreciation on machinery and building were justified. The order of the CIT(A) was set aside, and the AO's order was restored.