2016 (2) TMI 792 - AT - Income Tax

Addition on account of excess depreciation claimed - asset put to use - Held that - From the list of the machinery purchased by the assessee for the Baddi Unit, it reveals that the purchase of machinery was started from February, 2005 and production at Baddi unit was admittedly commenced from May, 2005 and therefore, no depreciation was claimed on the machinery installed at Baddi Unit for A.Y. 2005-06. It is also an admitted fact and evident that major part of machines at D-6 unit were shifted to Baddi Unit in the later part of the period. Therefore, without going into the question whether and which machines and for what value has been shifted from D-6 unit to Baddi unit during the year, the ld. CIT(A) has rightly observed that the assessee was entitled to claim full depreciation for the whole year, if the machinery has been used for more than 182 days. It is not the case of Revenue that the machines, on which depreciation was claimed by assessee were not put to use for more than 182 days or that the said machinery was not used for the purpose of business. In presence of these facts, we are inclined to sustain the findings of the ld. CIT(A) with respect to deletion of impugned addition. Addition on account of building improvement of 35 HPSIDC, Baddi and errection of machines - Held that - It is notable that no material or evidence was seized in the search to demonstrate that the assessee had incurred expenses in excess to that shown in the books of account. Moreover, on reference, the DVO, Chandigarh has valued the cost of construction of property No. 35 HPSIDC Baddi at ₹ 23,79,000/- on account of building improvement for A.Yrs. 2005-06 to 2007-08, which stands in consonance with the declared expense of ₹ 22,37,694/- shown by assessee in its books of accounts. Moreover, this issue has been decided by ITAT, Delhi Bench in assessee s own case for A.Y. 2006-07 to 2008-09 in favour of the assessee. Disallowance of 1/8th of the telephone expenses, vehicle depreciation & vehicle maintenance on adhoc basis - Held that - No expenditure is pointed out of inadmissible nature. The disallowance on mere suspicion and estimate is not sustainable in view of the decisions of Hon ble Supreme Court in the case of Dhakeshwari Cotton Mills 1954 (10) TMI 12 - SUPREME Court and Sayaji Iron & engineering Co. vs. CIT 2001 (7) TMI 70 - GUJARAT High Court , wherein it has been held that no disallowance is called for on account of personnel use of vehicle/telephone by the directors/officials in the hands of a company. We, therefore, do not find any justification to interfere with the order of the ld. CIT(A) on this count.- Decided in favour of assessee Addition on account of sale of scrap on estimated basis - Held that - The alleged notings, whatsoever, pertained to the years 2007-08 and 2008-09. Moreover, the Baddi Unit of assessee commenced production from May, 2005 and therefore, there is no reason to generate the scrap and sale thereof during the assessment year under consideration. We are, therefore, not inclined to interfere with the order of ld. CIT(A) deleting the impugned addition. - Decided in favour of assessee Disallowance u/s. 14A read with Rule 8D - Held that - AO has failed to establish any correlation of expenditure with the exempted income. During the year under consideration, there was exempt income for ₹ 1,45,161/- and on this income no expenses have apparently been incurred as during the year the investment has decreased from ₹ 324.97 lacs to 210.77 lacs. We, therefore, do not find any reason to disturb the finding of CIT(A) that there being no applicability of Rule 8D for A.Y. 2005- 06 and no nexus having been found between the expenses incurred vis- -vis the exempt income, the disallowance of ₹ 7,35,818/- is liable to be deleted. - Decided in favour of assessee

Summary

Issues:
1. Disallowance of excess depreciation
2. Addition of unaccounted expenses and investment
3. Disallowances of telephone expenses, vehicle depreciation, and vehicle maintenance
4. Addition on account of sale of scrap
5. Disallowances under section 14A of the Income Tax Act

Issue 1: Disallowance of Excess Depreciation
The appeal concerned the disallowance of Rs. 23,50,000 made by the Assessing Officer on account of excess depreciation claimed by the assessee for the assessment year 2005-06. The dispute arose from the shifting of machinery from one unit to another. The CIT(A) deleted the disallowance, stating that if the machinery was used for more than 182 days, full depreciation could be claimed. The ITAT upheld the CIT(A)'s decision, noting that the machinery had been put to use for business purposes for the required period. Thus, the ground of revenue was dismissed.

Issue 2: Addition of Unaccounted Expenses and Investment
The Assessing Officer estimated building improvement expenses at Rs. 65,00,000, adding Rs. 54,47,050 to the assessee's income. However, the CIT(A) deleted this addition, as no evidence was found during the search to support the higher expenses. The ITAT upheld the CIT(A)'s decision, citing a valuation report and a previous ITAT ruling in favor of the assessee. Consequently, the ground of revenue was dismissed.

Issue 3: Disallowances of Telephone Expenses, Vehicle Depreciation, and Vehicle Maintenance
The Assessing Officer disallowed a portion of telephone expenses, vehicle depreciation, and maintenance on an ad hoc basis. The ITAT held that disallowance based on suspicion and estimates was unjustified, citing relevant legal precedents. As there was no evidence of inadmissible expenses, the CIT(A)'s decision to delete the disallowances was upheld, and the revenue's ground was dismissed.

Issue 4: Addition on Account of Sale of Scrap
The AO added Rs. 10,00,000 for the sale of scrap based on notings from previous years found during the search. The CIT(A) deleted this addition due to lack of substantiated incriminating material for the current assessment year. The ITAT agreed with the CIT(A), noting that the alleged notings were not relevant to the year under consideration. Consequently, the revenue's ground was dismissed.

Issue 5: Disallowances under Section 14A of the Income Tax Act
The AO disallowed Rs. 7,35,818 under section 14A read with Rule 8D of the Act. However, the CIT(A) deleted this disallowance, following a Bombay High Court decision that Rule 8D was not applicable for the relevant assessment year. The ITAT upheld the CIT(A)'s decision, emphasizing the lack of correlation between expenses and exempted income. Thus, the revenue's ground was dismissed, and the appeal was ultimately rejected.