2010 (2) TMI 145 - HC - Income Tax

Depreciation- Business Expenditure- The respondent- assessee is engaged in the manufacture and sale of Indian made foreign liquor. The assessee filed a return of income declaring a loss of Rs. 4, 65,540. The assessee had claimed the depreciation on the assets amounting to Rs. 2, 09,536 on plant and machinery. The Assessing Officer had not granted the depreciation on the ground that the assessee had not carried on the business activity. Accordingly, the order passed by the Assessing Officer on January 31, 1997. On an appeal, the Commissioner of Income-tax (Appeals), came to the conclusion that the assessee forcibly closed his business activities on account of local problems. Consequently, he allowed the appeal Being aggrieved by the same, the Revenue filed an appeal before the Income-tax Appellate Tribunal, which appeal came to be rejected by the Tribunal confirming the order passed by the Commissioner of Income-tax (Appeals). Held that- The Assessing Officer has failed to take note of the fact that the assessee did not close its business activities on its own. But it was on account of unforeseen circumstance. Such closure will not disentitle the assessee to claim the depreciation. Thus, we hold the substantial questions of law arising in this appeal against the Revenue and in favour of the assessee. Accordingly, the appeal is dismissed.

Summary

Issues:
Challenge to concurrent findings of the order passed by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal regarding depreciation claimed by the assessee for a closed business activity.

Analysis:
The judgment dealt with the challenge raised by the Revenue against the concurrent findings of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal regarding the depreciation claimed by the assessee for a closed business activity. The assessee, engaged in manufacturing and selling Indian made foreign liquor, declared a loss for the assessment year 1994-95 due to the closure of business activities on account of local problems. The Assessing Officer disallowed depreciation claimed on assets, stating that no business activity was carried out. However, the Commissioner of Income-tax (Appeals) concluded that the closure was due to external factors, allowing the appeal. The Tribunal upheld this decision, leading to the Revenue's appeal before the High Court.

The first question of law raised was whether the assessee could claim depreciation and expenditure under relevant sections of the Income-tax Act despite no business activity during the assessment year. The appellant argued against allowing depreciation, citing a Supreme Court judgment. Conversely, the respondent contended that the closure was due to external factors beyond their control, not negligence, and thus depreciation should be permitted. The High Court noted that the closure was temporary due to unforeseen circumstances, distinguishing it from the Supreme Court case where closure was permanent and intentional.

The High Court emphasized that the assessee did not close the business voluntarily but due to external factors, which should not disentitle them from claiming depreciation. The closure was deemed an act of God or vis major, justifying the continuation of business activities once peace was restored. The Court differentiated the case at hand from the precedent cited by the Revenue, emphasizing the intention to revive business and the viability of the company. Consequently, the High Court upheld the decisions of the lower authorities, ruling in favor of the assessee and dismissing the appeal filed by the Revenue.

In conclusion, the High Court's judgment favored the assessee, allowing depreciation claimed for a closed business activity due to external factors beyond their control. The Court highlighted the temporary nature of the closure and the intention to resume operations once the situation improved, distinguishing the case from precedents where closures were permanent and intentional.