2002 (2) TMI 329 - AT - Income Tax

Summary

Issues:
1. Disallowance of depreciation on assets of branch oil mill.
2. Disallowance of business expenses incurred during the temporary suspension of production at the oil mill.

Issue 1: Disallowance of Depreciation on Assets of Branch Oil Mill:
The appeal was against the order of CIT(A) for the assessment year 1991-92. The AO disallowed depreciation claimed on the assets of the branch oil mill due to lack of business activity and non-usage of assets. The CIT(A) upheld this disallowance stating that no business was conducted in the branch office and machinery was not utilized. The appellant argued that the machinery was ready for use but remained idle due to lack of orders. They contended that the term "used" in Section 32(1) of the Income Tax Act includes passive use, such as keeping machinery ready for production. Various judgments were cited to support this argument. The Tribunal agreed with the appellant, noting that if assets are kept ready for use due to compelling business reasons, depreciation can be claimed. As the oil mill had worked in previous and subsequent years, the AO was directed to allow the depreciation claimed.

Issue 2: Disallowance of Business Expenses During Suspension of Production:
The second issue concerned the disallowance of business expenses totaling Rs. 2,64,360 by the CIT(A) due to the oil mill's temporary suspension of operations. The appellant argued that these expenses were essential for the business's continuation, even during the suspension period. They detailed various expenses like electricity, majoori, insurance, salary, bonus, and interest, explaining the necessity of these costs for maintaining the business. The appellant highlighted the interconnected nature of the branch office and the head office, emphasizing the common management and financial aspects. The Tribunal agreed with the appellant, observing that the expenses were incurred to ensure the business's continuity and were interconnected with the head office's operations. Therefore, the AO was directed to allow the deduction of the business expenses incurred during the suspension period, reversing the CIT(A)'s decision.

In conclusion, the Tribunal allowed the appeal, directing the AO to permit the depreciation claimed on assets of the branch oil mill and to allow the deduction of business expenses incurred during the temporary suspension of production.