2017 (12) TMI 990 - AT - Income Tax

Disallowance of depreciation - gurgoan unit had suspended working during the year - Held that - Under the law claim of the depreciation on the entire block of assets has been rightly made by the assessee and should have been allowed. The AO‟s contention that Gurgoan assets were not used therefore, depreciation should not be allowed is not in accordance with the provisions of the Act - Decided against revenue Disallowance of deprecation on electric fittings - rate of 15% OR 25% as claimed by the assessee - Held that - After careful consideration of the facts of the case, these fittings cannot be equated with normal electrical fittings. The items in question are related to plant and machinery and as such eligible for higher rate of depreciation i.e. 25%. The action of the AO is not upheld. Allowable business expenditure - Held that - CIT(A) has deleted holding that these expenditure was incurred for the purposes of the business and they are minimum amounts as per the rules. In view of this we do not find any infirmity in the order of the ld CIT(A) in deleting the above addition. accordingly, ground No. 3 of the appeal of the revenue is dismissed. Suppression of stocks with respect to dyes and moulds which was shown at opening stock but not in closing stock - Held that - CIT(A) has deleted the addition holding that the stocks not shown in the closing stock were in fact sold during the year and same were also supported by copy of the invoice as well as the correspondence. In view of this we do not find any infirmity in the order of the ld CIT(A) in deleting the above addition. Consequently, ground No. 4 of the appeal of revenue is dismissed. Addition on account of lower gross profit - Held that - The appellant has furnished the details called for. The books of account as prescribed are maintained and also the books of account are audited as seen from the 3 CA and 3 CD reports. Lower G.P. compared to earlier years may be one of the factors to be taken into account while resorting to rejection of trading results but it should not be the sole basis. The AO made some theoretical calculations and proceeded to estimate income. The action of the AO is not in accordance with the legal position as on date on the issue. In view of the above discussion, the AO is hereby directed to accept the G.P. declared by the appellant Disallowing on account of payment of ESI - Held that - The above payment is on additional payment of ESI and not at all in any way can be said that it is penalty or infringement. Therefore, disallowance of this payment is totally devoid of merits and should be deleted. Disallowance of bad debts with respect to two parties who are the customers of the assessee and whose accounts have been written off - Held that - CIT(A) allowed the claimed of the assessee as it satisfied necessary conditions. The ld AO disallowed it as the assessee could not file copies of the account of the assessee from the books of those parties. We do not find any justification for making this addition and hence, ld CIT(A) has rightly deleted the above disallowance. In the result ground No. 7 of the appeal is dismissed. Addition as expenses on freight and cartage extremely high as compared to previous year - Held that - The above disallowance was deleted by the ld CIT(A) holding that AO has not pointed out any mistake in the details furnished but has made disallowance on ad hoc basis. We do not find any infirmity in the order of the ld CIT(A) in deleting the above addition. in the result ground No. 8 of the appeal is dismissed. Addition holding that club subscription did not have any nexus with the business of the assessee - Held that - CIT(A) deleted the above disallowance holding that AO has not given any reason for the disallowance. Therefore, we confirm the order of the ld CIT(A) in deleting for which we also could not find any reason in the assessment order. In the result ground No. 9 of the appeal is dismissed.

Issues Involved:
1. Disallowance of depreciation on assets transferred to Gurgaon Unit.
2. Disallowance of depreciation on electrical fittings.
3. Disallowance of electrical expenses.
4. Addition on account of suppression of stock.
5. Addition on account of estimation of gross profit.
6. Disallowance of payment to ESIC.
7. Disallowance of bad debts.
8. Disallowance of freight and cartage expenses.
9. Disallowance of club subscription expenses.

Detailed Analysis:

1. Disallowance of Depreciation on Assets Transferred to Gurgaon Unit:
The Assessing Officer (AO) disallowed ?19,92,000 in depreciation, arguing that the Gurgaon unit was not operational during the year, and hence the assets were not used for business purposes. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the depreciation, citing that the assets were transferred to another unit and used for manufacturing. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, agreeing that the assets were part of the block of assets and eligible for depreciation.

2. Disallowance of Depreciation on Electrical Fittings:
The AO disallowed ?2,77,343 in depreciation on electrical fittings, applying a 15% rate instead of the 25% claimed by the assessee. The CIT(A) allowed the higher rate, noting that the electrical fittings were integral to the plant and machinery. ITAT confirmed this decision, finding no error in the CIT(A)'s order.

3. Disallowance of Electrical Expenses:
The AO disallowed ?4,50,567 in electrical expenses, arguing that the building was not used for business and the expenses were not allowable under Section 37(1) of the Income Tax Act, 1961. The CIT(A) allowed the expenses, stating they were incurred to protect business assets. ITAT agreed with the CIT(A), noting the expenses were necessary for business purposes.

4. Addition on Account of Suppression of Stock:
The AO added ?8,97,391 for alleged suppression of stock, claiming that certain dies and molds shown as opening stock were not accounted for in the closing stock. The CIT(A) deleted the addition, accepting the assessee's explanation that the items were sold or scrapped. ITAT upheld this decision, finding the CIT(A)'s reasoning sound.

5. Addition on Account of Estimation of Gross Profit:
The AO added ?1,00,97,203 due to a lower gross profit rate, rejecting the assessee's books of account. The CIT(A) deleted the addition, noting that the books were properly maintained and audited, and the lower gross profit was due to decreased selling prices and increased raw material costs. ITAT agreed with the CIT(A), finding no defects in the books of account.

6. Disallowance of Payment to ESIC:
The AO disallowed ?9,332 paid to the Employees' State Insurance Corporation (ESIC), treating it as a penalty. The CIT(A) allowed the deduction, clarifying that it was an additional payment for temporary staff and not a penalty. ITAT upheld the CIT(A)'s decision.

7. Disallowance of Bad Debts:
The AO disallowed ?1,06,127 in bad debts, as the assessee could not provide copies of the accounts from the books of the debtors. The CIT(A) allowed the deduction, finding the necessary conditions for bad debts were satisfied. ITAT confirmed the CIT(A)'s order.

8. Disallowance of Freight and Cartage Expenses:
The AO disallowed ?5,00,000 in freight and cartage expenses, considering them excessively high compared to the previous year. The CIT(A) deleted the disallowance, noting that the AO made the disallowance on an ad hoc basis without pointing out any specific errors. ITAT upheld the CIT(A)'s decision.

9. Disallowance of Club Subscription Expenses:
The AO disallowed ?11,405 in club subscription expenses, arguing there was no nexus with the business. The CIT(A) deleted the disallowance, noting the AO did not provide any reason for it. ITAT confirmed the CIT(A)'s order.

Conclusion:
The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The tribunal criticized the AO's approach, noting that many disallowances were made on conjectures and surmises, and the appeal itself was not justified, resulting in a waste of public resources.

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