2008 (5) TMI 308 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of depreciation on assets discarded by the assessee.
2. Disallowance of interest on advances given to related parties.

Summary:

Issue 1: Disallowance of Depreciation on Discarded Assets

In these appeals, the only ground raised by the assessee is with regard to disallowance of Rs. 58,01,785 towards depreciation in respect of the assets discarded by the assessee during the year under consideration.

The AO reopened the assessment u/s 147 and issued notice u/s 148, disallowing the depreciation claimed on assets written off, arguing that the assets were not used for business purposes during the year. The CIT(A) confirmed the AO's action, holding that the assessee was not entitled to depreciation on discarded assets.

The learned counsel for the assessee argued that the depreciation should be allowed on the WDV of the entire block of assets as per s. 32(1) r/w s. 43(6) of the Act, even if some assets were discarded. The learned Departmental Representative supported the orders of the authorities below, contending that the WDV of discarded assets should be reduced from the block of assets.

The Tribunal held that the scheme of depreciation effective from 1st April, 1988, introduced block depreciation, and the WDV of the block of assets should be adjusted only as per s. 43(6). The AO's action of reducing the WDV by the individual WDV of discarded assets was not justified. The AO was directed to recompute the depreciation after ascertaining the scrap value of the discarded assets.

Issue 2: Disallowance of Interest on Advances to Related Parties

Ground No. 2 for asst. yr. 2001-02 is directed against disallowance of Rs. 15,210 towards interest on advances given to related parties.

The AO disallowed the interest on the ground that advances were given to related parties, and the assessee incurred interest expenses on the same. The learned counsel for the assessee argued that the advances were for bona fide business transactions with related parties and not interest-free advances without commercial considerations.

The Tribunal found that the AO did not verify the facts and rejected the assessee's explanation without proper examination. The payments to related parties were for business considerations and expediency. Therefore, the proportionate interest paid on borrowed capital could not be disallowed, and the disallowance was deleted.

Conclusion:

In the result, the appeals filed by the assessee for asst. yrs. 2000-01 and 2001-02 are partly allowed in the manner indicated above.