2020 (1) TMI 560 - AT - Income Tax

Carry forward and set-off of unabsorbed depreciation of proprietary concern against partnership firm - claim denied by AO on the ground that the firm cannot claim set-off of unabsorbed depreciation of the proprietary concern - CIT(A) following the decision in the case of the CIT v. Madhukant M. Mehta 1997 (4) TMI 73 - SUPREME COURT allowed the claim of the assessee since there was a succession by the partnership firm from the proprietary concern and the provisions of the section 78(2) provides for set off of unabsorbed loss/depreciation in cases of inheritance - HELD THAT - We hold that since the proprietary concern was succeeded by the legal heirs and the proprietary business was carried on by the legal heirs of the deceased by converting the same into partnership firm there is an inheritance of business and therefore, as per the provisions of the section 78(2) assessee is entitled to set-off business loss/unabsorbed depreciation of the proprietary concern against income of the successor partnership firm. Thus, we sustain the order of the CIT(A) and reject the grounds raised by the revenue. Additional ground in respect of expenses/debts which were not claimed in the return of income - HELD THAT - On hearing both the sides and respectfully following the decision of the Hon'ble Bombay High Court in the case of the CIT v. PRUTHVI Brokers Shareholders Pvt. Ltd 2012 (7) TMI 158 - BOMBAY HIGH COURT we restore the claim of the assessee in respect of expenses/debts, to the file of the Ld. CIT(A) who shall decide on merits after providing adequate opportunity of being heard to the assessee. Disallowance @10% of loading and unloading expenses, hawali charges incurred by the assessee - As observing that cash component and element of personal use in the aforesaid expenses cannot be ruled out keeping in view the nature of business of the assessee firm that is transportation, the Ld. CIT(A) sustained the disallowance to the extent of 5% of the expenses as against 10% disallowed by the Assessing Officer. Similarly, for the A.Y. 2014-15 the CIT(A) restricted the disallowance to ₹.2,00,000/- as against 10% disallowed by the AO. We direct the Assessing Officer to restrict the disallowance to ₹.2,00,000/- for both the assessment years i.e. 2013-14 and 2014-15 to meet the ends of justice.

Issues:
1. Set off of unabsorbed depreciation in the hands of legal heirs based on section 78(2) of the Income Tax Act.
2. Applicability of Supreme Court judgments in cases of carry forward and set off of losses versus unabsorbed depreciation.
3. Denial of claim for set off of unabsorbed depreciation by Assessing Officer.
4. Admissibility of additional ground in respect of expenses/debts not claimed in the return of income.
5. Adhoc disallowance of expenses by the Ld. CIT(A).

Issue 1: Set off of unabsorbed depreciation:
The appeals and cross objection revolved around the set off of unabsorbed depreciation in the hands of legal heirs based on section 78(2) of the Income Tax Act. The Assessing Officer initially disallowed the claim for set off, stating that unabsorbed depreciation cannot be carried forward for set off by another person. However, the Ld. CIT(A) allowed the claim, citing the decision of the Hon'ble Supreme Court in the case of CIT v. Madhukant M. Mehta. The tribunal upheld the Ld. CIT(A)'s decision, emphasizing that there was a succession by the partnership firm from the proprietary concern, enabling the set off as per the provisions of section 78(2) of the Act.

Issue 2: Applicability of Supreme Court judgments:
The revenue raised concerns regarding the application of Supreme Court judgments, arguing that the judgments referred to carry forward and set off of losses, not unabsorbed depreciation. However, the tribunal found that the decision in the case of CIT v. Madhukant M. Mehta was directly applicable to the case, as it involved a similar scenario of succession from a proprietary concern to a partnership firm, allowing for the set off of unabsorbed depreciation.

Issue 3: Denial of claim by Assessing Officer:
The Assessing Officer denied the claim for set off of unabsorbed depreciation by the legal heirs, leading to the appeal. The tribunal, following the precedent set by the Supreme Court, ruled in favor of the assessee, highlighting the succession from the proprietary concern to the partnership firm as the basis for allowing the set off.

Issue 4: Admissibility of additional ground:
The cross objections filed by the assessee included a ground related to the rejection of additional expenses/debts not claimed in the return of income. The Ld. CIT(A) had rejected this additional ground, but the tribunal, citing the decision of the Hon'ble Bombay High Court, directed the Ld. CIT(A) to reconsider the claim on its merits, emphasizing the authority's power to entertain additional claims.

Issue 5: Adhoc disallowance of expenses:
The Ld. CIT(A) sustained adhoc disallowances of expenses, which were challenged in the cross objections. The tribunal reviewed the disallowances and directed the Assessing Officer to restrict the disallowance to a specified amount for both assessment years to ensure justice.

In conclusion, the tribunal upheld the decision of the Ld. CIT(A) regarding the set off of unabsorbed depreciation, considered the applicability of Supreme Court judgments, addressed the denial of the claim by the Assessing Officer, emphasized the admissibility of additional grounds, and adjusted the adhoc disallowance of expenses for fairness.

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