2022 (5) TMI 937 - AT - Income Tax

Depreciation in respect of certain capitalized amount in the nature of URD purchases unregistered dealers forming part of the building - HELD THAT - We find that the assessment order is silent as to the quantum of alleged bogus/inflated expenses. As pointed out by Ld A.R, there are technical specifications regarding the quantum of consumption of various materials in the construction of a building. The moot question is, if the alleged bogus/inflated purchases are removed from the value of construction, whether the same would meet the technical specifications relating to quantum of usage of various materials required for construction of building. Admittedly, this exercise has not been carried out. There was no occasion for the assessee to carry out the said exercise, since it has maintained its stand that all URD purchases are genuine. However, the AO has not done the same. We also notice that the AO has also not effectively dealt with legal effect of the retraction of the sworn statement given by Shri Shyama Raju. However, we do not find it necessary to deal with these questions for the reasons discussed in the ensuing paragraphs. Be that as it may, we noticed that the assessing officer did not make any addition with regard to the URD purchases, which were considered to be bogus or inflation of expenses, in the respective years. In our considered view, without making addition of alleged bogus/inflated expenses, the A.O. could not have disallowed the depreciation alone in A.Y. 2014-15. Accordingly, we are of the view that the disallowance of depreciation made by the A.O. in assessment year 2014-15 is not justified in the facts and circumstances of the case. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete the disallowance of depreciation made in A.Y. 2014-15. Since no addition was made in other years, there is no issue on merits requiring adjudication on merits. Disallowance u/s 14A for making addition to the net profit under clause (f) of Explanation 1 to sec. 115JB - HELD THAT - We notice that the Ld CIT(A) has followed the decision rendered by Delhi Special Bench of Tribunal in the case of Vireet Investments Pvt Ltd 2017 (6) TMI 1124 - ITAT DELHI - However, we notice that the Ld CIT(A) has deleted the addition made to book profit u/s 115JB of the Act. The special bench has only said that the disallowance computed u/s 14A of the Act cannot be adopted straight away for the purpose of clause (f) of Explanation 1 to sec.115JB of the Act, meaning thereby, the amount to be added under clause (f) of Explanation 1 to sec.115JB of the Act has to be computed independently having regard to the books of account. Accordingly, we modify the order passed by Ld CIT(A) on this issue in AY 2012-13 to 2014-15 and restore this issue to the file of AO with the direction to compute the addition to be made clause (f) of Explanation 1 to sec.115JB of the Act independently on the basis of books of accounts.

Summary

Issues Involved:
1. Disallowance of depreciation on URD purchases.
2. Validity of initiation of proceedings u/s 153C of the Act.
3. Validity of search proceedings conducted u/s 132 of the Act.
4. Addition u/s 14A of the Act.
5. Computation of book profit u/s 115JB of the Act.

Detailed Analysis:

1. Disallowance of Depreciation on URD Purchases:
The primary issue in the appeals filed by M/s Divyashree Infrastructure and M/s Shyamaraju & Co (India) Pvt Ltd pertains to the disallowance of depreciation on URD (Unregistered Dealers) purchases. The Assessing Officer (AO) disallowed the depreciation claimed on the grounds that the URD purchases were bogus, based on a sworn statement by the Chairman and Managing Director, which was later retracted. The AO did not make any addition for the alleged bogus/inflated expenses in the respective years but disallowed the depreciation claimed in AY 2014-15. The Tribunal found merit in the assessee's contention that the URD purchases were genuine and necessary for construction, and noted that the AO did not examine the technical feasibility of constructing the building without these materials. The Tribunal held that without making an addition for the alleged bogus/inflated expenses, the AO could not disallow the depreciation alone. Consequently, the disallowance of depreciation in AY 2014-15 was set aside, and the AO was directed to delete the disallowance.

2. Validity of Initiation of Proceedings u/s 153C of the Act:
In the appeals for AY 2008-09 to 2013-14, the assessee challenged the validity of the initiation of proceedings u/s 153C of the Act. However, since the Tribunal deleted the addition made by the AO on merits, these legal issues became academic in nature and were not adjudicated.

3. Validity of Search Proceedings Conducted u/s 132 of the Act:
Similarly, the assessee also challenged the validity of the search proceedings conducted u/s 132 of the Act in AY 2008-09 to 2013-14. As the Tribunal deleted the addition on merits, these legal issues were deemed academic and were not adjudicated.

4. Addition u/s 14A of the Act:
The AO made additions u/s 14A of the Act in AY 2012-13 to 2014-15, which were confirmed by the CIT(A). However, the Tribunal did not specifically address these additions in the judgment.

5. Computation of Book Profit u/s 115JB of the Act:
The AO made additions to the book profit u/s 115JB of the Act by adopting the disallowance computed u/s 14A. The CIT(A) held that the disallowance computed u/s 14A cannot be imported into the provisions of section 115JB, relying on the decision of the Delhi Special Bench in ACIT Vs. Vireet Investment Pvt. Ltd. The Tribunal modified the CIT(A)'s order, directing the AO to compute the addition to be made under clause (f) of Explanation 1 to sec. 115JB independently based on the books of accounts.

Conclusion:
The appeals filed by M/s Divyashree Infrastructure and M/s Shyamaraju & Co (India) Pvt Ltd for AY 2008-09 to 2014-15 were allowed, and the disallowance of depreciation on URD purchases was deleted. The appeals filed by the revenue for AY 2012-13 to 2014-15 were partly allowed, with a direction to the AO to independently compute the addition to book profit u/s 115JB based on the books of accounts.