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2016 (8) TMI 421 - AT - Income TaxSet off unabsorbed depreciation against the deemed income under section 69, 69A, 69B and 69C - deemed income - Held that - The issue is, therefore, covered in favour of the assessee by the order of the ITAT Chandigarh Bench in the case of M/s Liberty Plywood 2013 (1) TMI 510 - ITAT CHANDIGARH wherein held that the adjustment of current year or unabsorbed depreciation can be made against such deemed income - Decided against revenue Disallowance u/s 36 (1)(iii) - DR contended that no details are filed before the Assessing Officer regarding availability of the funds - Held that - CIT(Appeals) recorded specifically that there is no finding of the Assessing Officer on fulfillment of the conditions of proviso to Section 36(1)(iii) of the Act. Term loans raised were found old and against machinery installed in earlier years which fact was not disputed by the Assessing Officer. There was no finding of the Assessing Officer to the effect that asset is for the expansion of the existing business. The assessee explained that it is constructing a building at Doraha and the place is used for storage. The Assessing Officer has nowhere held that building being constructed is for expansion of the existing business. Therefore, provisions of Section 36(1)(iii) and 43(1) would not be attracted in this case. Further, the assessee explained that it has sufficient funds available for raising the construction on which no interest has been paid. The ld. CIT(Appeals) has given a specific finding that in the absence of any finding by the Assessing Officer regarding any term loan having been raised for building construction, the ld. CIT(Appeals) was justified in deleting the addition. There is no merit in this ground of appeal of the revenue - Decided against revenue
Issues Involved
1. Set-off of unabsorbed depreciation against deemed income under sections 69, 69A, 69B, and 69C of the Income Tax Act. 2. Deletion of addition under section 36(1)(iii) of the Income Tax Act. Detailed Analysis Issue 1: Set-off of Unabsorbed Depreciation Against Deemed Income Background: The revenue challenged the order of the CIT(Appeals) allowing the assessee to set off unabsorbed depreciation up to ?50 lacs against deemed income under sections 69, 69A, 69B, and 69C of the Income Tax Act. During survey proceedings, discrepancies were found, leading the assessee to voluntarily disclose additional income of ?50 lacs. The Assessing Officer (AO) treated this as deemed income and disallowed the set-off of business loss/depreciation loss against it, citing the case of Kim Pharma Pvt. Ltd. CIT(Appeals) Decision: The CIT(Appeals) allowed the set-off of unabsorbed depreciation, referencing the ITAT Chandigarh Bench decision in Liberty Plywood Pvt. Ltd., which permitted such set-off. The CIT(Appeals) noted that the Punjab & Haryana High Court's decision in Kim Pharma Pvt. Ltd. did not address the issue of setting off depreciation under section 32(2). Tribunal's Analysis: The Tribunal upheld the CIT(Appeals) decision, reiterating that the set-off of unabsorbed depreciation is permissible. The Tribunal emphasized that the decision in Kim Pharma Pvt. Ltd. dealt with the set-off of losses under sections 70 and 71, not depreciation under section 32(2). The Tribunal also referenced the Special Bench decision in Times Guaranty Ltd., which allowed the set-off of unabsorbed depreciation from deemed income. Therefore, the Tribunal dismissed the revenue's appeal on this ground. Issue 2: Deletion of Addition Under Section 36(1)(iii) Background: The revenue contested the deletion of an addition of ?3,79,158 under section 36(1)(iii). The AO noted that the assessee had shown a building under construction and questioned why the interest should not be capitalized since the building was not yet put to use. The AO disallowed the interest, citing the Punjab & Haryana High Court decision in Abhishek Industries Ltd., which mandates capitalization of interest paid for the acquisition of assets before they are put to use. CIT(Appeals) Decision: The CIT(Appeals) deleted the addition, noting that the assessee had sufficient interest-free funds available and that the AO had not established a nexus between borrowed funds and the construction of the building. The CIT(Appeals) also highlighted that the AO did not find the building to be for the expansion of existing business, thus not attracting the proviso to section 36(1)(iii). Tribunal's Analysis: The Tribunal agreed with the CIT(Appeals), emphasizing that the AO failed to demonstrate that borrowed funds were used for the construction of the building. The Tribunal noted that the assessee had sufficient interest-free funds and that the term loans were old and against machinery installed in earlier years. Additionally, the Tribunal found no evidence that the building was for the expansion of existing business. Consequently, the Tribunal dismissed the revenue's appeal on this ground as well. Conclusion The Tribunal dismissed the departmental appeal, upholding the CIT(Appeals) decision to allow the set-off of unabsorbed depreciation against deemed income and to delete the addition under section 36(1)(iii). The Tribunal's decision was based on the interpretation of relevant legal precedents and the specific facts of the case.
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