2018 (7) TMI 2095 - HC - Income Tax

Disallowance of depreciation u/s 32- factory of the assessee is closed, and therefore, the assessee is not using the assets for which the depreciation was claimed, and therefore, the assessee shall not be entitled to the depreciation under Section 32 - HELD THAT - Considering the fact that the assessee was in business however could not run the factory in the year under consideration because of the stay order granted by the Court and even otherwise, the business of the assessee was continued, and therefore, the learned Tribunal allowed the claim of the assessee of depreciation under Section 32 by observing that it cannot be said that the assessee stopped /closed the business, we are in complete agreement with the view taken by the learned Tribunal. Addition u/s 41(1) of cessation of liability - HELD THAT - Squarely covered against the revenue in view of the decision of the Hon'ble Supreme Court in the case of Commissioner v. Mahindra Mahindra Ltd. 2018 (5) TMI 358 - SUPREME COURT The factual matrix, which came to be considered by the learned Tribunal is that the Tribunal while deleting the addition made under Section 41(1) on account of cessation of the liability, namely, the assessee had not written off the liability in the books of accounts, and therefore, the liability with respect to debtors is not ceased is concerned, considering the aforesaid factual matrix and when in the books of accounts the assessee carried forward and continued the liability and has not written off, no error has been committed by the learned Tribunal in deleting the addition made by the learned Assessing Officer under Section 41(1) on account of cessation of liability.

Summary

Issues:
1. Disallowance of depreciation under Section 32 of the Income Tax Act.
2. Addition under Section 41(1) of the Income Tax Act on account of cessation of liability.

Analysis:

Issue 1: Disallowance of Depreciation under Section 32
The appellant challenged the order of the Income Tax Appellate Tribunal (ITAT) which allowed the appeal by the assessee and deleted the addition made on account of disallowance of depreciation of ?34,03,491. The Assessing Officer disallowed the depreciation claimed by the assessee as the factory was closed, and assets were not being used. However, the Tribunal considered that the assessee was still in business, could not operate the factory due to a court stay order, and continued its business activities. The Tribunal held that the assessee did not stop or close the business, thereby justifying the depreciation claim under Section 32 of the Income Tax Act. The High Court agreed with the Tribunal's view, stating that the assessee's business continuity warranted the depreciation claim.

Issue 2: Addition under Section 41(1) for Cessation of Liability
The second proposed question of law pertained to the addition of ?54,24,294 made by the Assessing Officer under Section 41(1) of the Income Tax Act concerning the cessation of liability. The High Court noted that the Tribunal's decision to delete this addition was in line with a Supreme Court ruling in the case of Commissioner v. Mahindra & Mahindra Ltd. The Tribunal found that the liability with respect to debtors had not been written off in the books of accounts, indicating that the liability had not ceased. Since the assessee had carried forward and continued the liability without writing it off, the Tribunal's decision to delete the addition under Section 41(1) was upheld by the High Court. Consequently, the High Court concluded that no substantial question of law arose in the case, leading to the dismissal of the Tax Appeal.

In conclusion, the High Court upheld the Tribunal's decisions regarding the disallowance of depreciation under Section 32 and the addition under Section 41(1) for the cessation of liability. The judgment emphasized the importance of business continuity and proper accounting treatment in determining tax liabilities under the Income Tax Act.