2016 (7) TMI 1179 - AT - Income Tax

Disallowance of depreciation - CIT(A) delted the addition admitting additional evidence - Held that - A reading of Rule 46-A(2) 5, 01, 470/- were capitalized in the books of accounts and not claimed in the profit and loss account and how those charges can be linked to the use of machineries on which depreciation is claimed by the Assessee. It also needs to be examined as to whether the power 1, 75, 340/- was sufficient to carry out the job work charges claimed by the Assessee. For the reasons given above we are of the view that the order of the CIT(A) on this issue requires to be set aside and the issue needs to be looked into afresh by the AO in the light of the observations as set out above. We hold and direct accordingly. The AO will afford opportunity of being heard to the Assessee before deciding the issue. - Decided in favour of revenue

Issues Involved:

1. Whether the CIT(A) was justified in deleting the addition of ?70,99,318/- made by the AO by disallowing depreciation claimed by the Assessee.
2. Whether the CIT(A) violated Rule 46A of the Income Tax Rules, 1962 by considering additional evidence without giving the AO an opportunity for verification.

Detailed Analysis:

1. Justification of Deleting the Addition of ?70,99,318/-:

The Assessee, engaged in the manufacturing of ductile iron, claimed depreciation of ?74.60 lakhs for AY 2007-08. The AO disallowed ?70,99,318/- of this claim, arguing that the assets were not put to use as the factory building was incomplete. The AO noted that the factory building was shown as capital work in progress and questioned the feasibility of the Assessee's claim that production began in June 2006. The AO observed minimal power and fuel expenses, suggesting the generator was used only for construction and not for production.

The Assessee contended that 90% of the factory building was completed by AY 2007-08 and that the machinery was installed and used for job work. The Assessee detailed the expenses and depreciation claimed, emphasizing the operational status of the machine shop. The Assessee also highlighted job work for reputed clients and provided a breakdown of power and fuel expenses.

The CIT(A) accepted the Assessee's submissions, noting that the machinery in the machine shop was simple and could be installed quickly. The CIT(A) observed that the Assessee had incurred sufficient power and fuel expenses to justify the job work and that the depreciation claimed was for assets actually put to use.

2. Violation of Rule 46A of the Income Tax Rules, 1962:

The Revenue argued that the CIT(A) relied on additional evidence, specifically electricity bills, without allowing the AO to verify them, violating Rule 46A. The Assessee countered that the CIT(A)'s conclusion was based on power and fuel expenses recorded in the profit and loss account, not solely on the electricity bills. The Assessee also claimed that the electricity bills were shown to the AO during the assessment proceedings.

The Tribunal noted that there was no evidence that the electricity bills were presented to the AO. The CIT(A) relied on these bills and other details not available to the AO, constituting a violation of Rule 46A. The Tribunal emphasized the mandatory nature of Rule 46A, which requires the CIT(A) to give the AO an opportunity to examine additional evidence and provide a rebuttal.

Conclusion:

The Tribunal found that the CIT(A) violated Rule 46A by considering additional evidence without proper procedure. Consequently, the Tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for a fresh examination. The AO was directed to allow the Assessee to present further evidence and to provide an opportunity for a hearing before making a new decision.

Order:

For statistical purposes, the appeal of the Revenue was treated as allowed. The AO was instructed to re-examine the issue, considering the Tribunal's observations and ensuring compliance with Rule 46A.

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