2017 (3) TMI 1034 - AT - Income Tax

Claim of depreciation - Held that - Depreciation is a general principle represents the diminution in the value of a capital asset, when apply to the purpose. Thus, the term depreciation is to be understood in commercial sense then it can be said that it is a normal wear and tear, which required to be replaced at a point of time in future - See CIT vs Anand Theaters (2000 (5) TMI 4 - SUPREME Court ) When two views are possible, which favour the assessee, has to be followed, further favours the case of the assessee. Further, it is not the case of the Department that the machinery was never put to use by the assessee for its manufacturing activity as it is an admitted position in earlier year, the claimed depreciation was allowed to the assessee. During the relevant period, due to lull in the business, the manufacturing activity was not carried out. It is not the case that the manufacturing activity was permanently stopped rather due to temporary lull in the business, in a hope of improvement in the market condition, the machinery was kept ready for use. Since, the depreciation is statutory allowance and the manufacturing activity was temporarily stopped, therefore, it has to be allowed. Thus, this ground of the assessee is allowed. Ad-hoc addition to the gross profit and further making enhancement in the gross profit percentage to 1.89% by rejecting the books of account of the assessee - Held that - We find that the assessee duly produced the party-wise details of purchase and sales with the help of register maintained for this purpose and also confirmation from the concerned parties. Ld. Assessing Officer issued notices u/s 133(6) of the Act to all the creditors to which all the parties attended/submitted their replies as is evident from para 5.3 of the impugned order. As is evident from the assessment order itself (para-7) that certain discrepancies were noticed in the audit report, meaning thereby, the audit report was duly filed by the assessee. In the assessment order itself (para-7-II), there is a mention that during assessment proceedings itself, the assessee filed audit report on 13/10/2009. It means the audit report was filed by the assessee, which was ignored by the ld. Assessing Officer. It is also noted that for Assessment Year 2009-10, the same GP was accepted by the Department, while framing the assessment u/s 143(3) of the Act, therefore, there is no reasons to increase the same by 1.89% of the turnover. Therefore, the ld. Assessing Officer is directed to delete the ad-hoc enhancement to the tune of 1.89% and accept the gross profit accepted for Assessment Year 2009-10 as there is no reason to increase the gross profit, without bringing contrary facts on record, thus, this ground of the assessee is allowed and disposed off in terms indicated hereinabove.

Summary

Issues Involved:
1. Disallowance of depreciation on machinery.
2. Ad-hoc addition to gross profit and enhancement of gross profit percentage by rejecting the books of account.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation on Machinery:
The assessee contested the disallowance of ?2,75,521/- as depreciation on machinery. The primary argument was that the machinery, although not used for manufacturing during the relevant period due to irregular power supply and adverse market conditions, was kept ready for use. The assessee emphasized that the business was not closed but only temporarily suspended, and depreciation had been allowed in previous years for the same machinery.

The Revenue defended the disallowance, asserting that no manufacturing activity was conducted during the relevant period, and thus, the machinery was not put to use.

Upon reviewing the submissions and records, it was noted that the assessee continued trading activities and had not completely shut down the business. The Tribunal analyzed Section 32 of the Income Tax Act, which allows depreciation on tangible and intangible assets used for business or profession. The Tribunal referenced various judicial precedents, including CIT vs. Anand Theaters and CIT vs. Daudayal Hotels Pvt. Ltd., which support the notion that depreciation represents a normal wear and tear of assets.

The Tribunal concluded that since the machinery was kept ready for use and the business was not permanently shut down, the depreciation should be allowed. However, it was clarified that this allowance could not be indefinite and steps should be taken to resume manufacturing activities.

2. Ad-hoc Addition to Gross Profit and Enhancement of Gross Profit Percentage:
The second issue pertained to an ad-hoc addition of ?8,20,203/- to the gross profit and the enhancement of the gross profit percentage to 1.89% by rejecting the assessee's books of account. The assessee argued that the gross profit percentage for the relevant assessment year was consistent with the previous year (2009-10), which the Department had accepted. The assessee also pointed out that the tax audit report was filed but ignored by the Assessing Officer.

The Revenue contended that there was no compliance with the notice issued to the assessee and that the books of accounts were not audited, justifying the estimation of gross profit.

The Tribunal reviewed the facts and noted that the assessee had produced party-wise details of purchases and sales, and confirmations from concerned parties. Notices issued to creditors were responded to, indicating compliance. It was also observed that the audit report was indeed filed during the assessment proceedings, contradicting the Assessing Officer's claim.

Given that the same gross profit percentage was accepted for the previous year and no contrary facts were brought on record, the Tribunal directed the deletion of the ad-hoc enhancement and instructed the acceptance of the gross profit percentage from the previous year.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal directing the allowance of depreciation on machinery and the deletion of the ad-hoc enhancement to the gross profit percentage. The order was pronounced in the open court on 21/02/2017.