2017 (5) TMI 833 - AT - Income Tax

Scope of Rectification of mistake - AO issued notice u/s 154 requiring the assessee to explain as to why depreciation claimed by the assessee should not be disallowed as there was no generation of power - Held that - AO has completed the assessment u/s 153A of the Act and hence all the facts were before him. The power generating unit did not function during the previous year. However, that would not itself justify the order passed by the AO u/s 154 of the I.T. Act. Since there is no mistake apparent on record and also relying on the ratio of the decision of the Delhi High Court in Capital Bus Service Pvt. Limited case 1980 (2) TMI 69 - DELHI High Court wherein held The allowances for normal depreciation does not depend upon the actual working of the machinery; it is sufficient if the machinery in question is employed by the assessee for the purposes of the business and for no other business and it is kept by him ready for actual use. Thus we hold that the order u/s 154 passed by the AO is not correct and allow the assessee s appeal.

Summary

Issues:
Assessment of depreciation on assets not put to use for business purpose, validity of order passed under section 154 of the Income Tax Act, consideration of power generation unit's functionality for depreciation allowance.

Analysis:

1. Depreciation Disallowance: The case involves the disallowance of depreciation claimed by the assessee on assets like canals, power house, and machinery, as they were not put to use for business purposes during the relevant financial year. The Assessing Officer (AO) proposed to disallow the depreciation, and the order was modified under section 154 of the Income Tax Act. The CIT (A) upheld the AO's decision, stating that the depreciation disallowance was justified.

2. Validity of Order under Section 154: The assessee challenged the order passed under section 154 of the Income Tax Act, contending that the issues related to depreciation disallowance cannot be considered under this section. The assessee argued that there was no mistake apparent from the record to warrant the order under section 154. The CIT (A) confirmed the order passed under section 154, leading to the appeal before the Appellate Tribunal.

3. Consideration of Power Generation Unit's Functionality: The AO based the disallowance of depreciation on the fact that the power generating unit did not function during the previous year. However, the assessee explained that power generation was affected due to external factors such as drought conditions and low water levels. The Appellate Tribunal referred to a precedent from the Delhi High Court, emphasizing that the machinery need not be actively used as long as it is kept ready for business purposes. The Tribunal concluded that the AO's order under section 154 was not justified, considering the circumstances and the Delhi High Court's ruling.

In conclusion, the Appellate Tribunal allowed the assessee's appeal, overturning the order passed under section 154 of the Income Tax Act. The Tribunal held that the disallowance of depreciation was not warranted as per the circumstances and legal interpretation provided by the Delhi High Court precedent.