2017 (11) TMI 902 - AT - Income Tax

Disallowance of depreciation - beneficial owner of the asset - Held that - A perusal of section 32 would indicate that for grant of deprecation this section contemplates two conditions. The assessee should be owner of the asset, and the asset has been used for the purpose of business. According to the AO the expression used employed in this section would construed as actual user and in case in any year the asset is not used then the assessee will not be entitled for the depreciation. However, in a large number of authoritative pronouncements it has been observed that expression used employed in section would embrace deemed user of the asset. The assessee has not closed its business, rather on account of stay operation from the Court manufacturing activities were stopped. The assets were ready for use for the purpose of the business and there was constructive user of the asset. Therefore, depreciation ought to be granted to the assessee - Decided in favour of assessee Addition u/s 41(1) - Held that - AO has not brought any evidence on the record to show that liability has ceased. The assessee has not written off the liability in the accounts. Therefore, there would not be any addition under section 41(1) of the Act. Hon ble High Court in the case of Bhogilal Ramjibbhai Atara (2014 (2) TMI 794 - GUJARAT HIGH COURT) considered this aspect and observed that even if debt itself is found to be non-genuine from the very inception that also in terms of section 41(1) of the Act, there is no solution for that. In other words, addition cannot be made unless liability in the accounts has been written off. Therefore, following the decision of the Hon ble Gujarat High Court in the case of Bhoghilal Ramjibhai Atara (supra), we allow this ground of appeal and delete disallowance.- Decided in favour of assessee

Summary

Issues:
1. Disallowance of depreciation amount
2. Addition under section 41(1) of the Income Tax Act, 1961

Issue 1: Disallowance of Depreciation Amount

The assessee appealed against the confirmation of disallowance of depreciation amounting to ?22,71,970 by the ld.CIT(A). The AO disallowed the depreciation claim as the business was considered closed with no business income during the year. The assessee argued that the business was not permanently closed but had a deemed suspension due to a dispute over a trademark. The assets were ready for use, indicating a constructive user. The Tribunal observed that the term "used" in section 32 includes deemed user, and as the business was not permanently closed, depreciation should be granted. The ground of appeal was allowed, and the disallowance was deleted.

Issue 2: Addition under Section 41(1) of the Income Tax Act, 1961

The second ground of appeal was against the confirmation of an addition of ?54,24,294 under section 41(1) by the ld.CIT(A). The AO assumed liabilities had ceased due to no manufacturing activity since 2005. The Tribunal noted that section 41(1) applies when a trading liability allowed as a deduction earlier benefits the assessee due to remission or cessation in a later year. The Hon'ble Gujarat High Court's decision emphasized that unless liabilities are written off in the accounts, no addition can be made under section 41(1). As there was no evidence of liabilities ceasing or being written off, the addition was deemed inappropriate. Citing the High Court's decision, the Tribunal allowed this ground of appeal and deleted the disallowance.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning both the disallowance of depreciation and the addition under section 41(1) of the Income Tax Act, 1961. The judgment was pronounced on 9th October 2017 at Ahmedabad.