2020 (10) TMI 506 - AT - Income Tax

Disallowance of expenditure towards purchase of tools - Revenue or capital expenditure - HELD THAT - Assessee has drawn its statement of affairs adhering to the principle of materiality concept. In this situation, we are of the considered view that the disallowance made by AR is not warranted as the expenditure claimed by the assessee is too negligible compared to the volume of the business of the assessee and further it is meaningless to maintain the negligible assets in the books of accounts of the assessee. Claiming these expenditures as deduction is only revenue neutral because even otherwise depreciation has to be allowed on these petty assets. Hence, we hereby set-aside the order of the CIT (A) on this issue and further direct the AO to delete the addition and accordingly withdraw the benefit of depreciation granted to the assessee. Disallowance of depreciation - demolition of the building - HELD THAT - As per the provisions of section 32(1)(iii) it is apparent that the amount of ₹ 17,38,711/- has to be removed from the block of assets and conversely treated as depreciation. It appears from the orders of the Ld. Revenue Authorities that they have only partially followed the provisions of the Act by excluding the amount of ₹ 17,38,711/- from the block of assets without granting depreciation for the entire amount of ₹ 17,38,711/- which is erroneous. Therefore, we hereby set aside the order of the Ld. CIT (A) on this issue and further direct the Ld. AO to grant depreciation of ₹ 17,38,711/- towards the demolition of the building and delete the same from the block of asset. While doing so, the Ld. AO shall also ensure that the same amount is not claimed as loss in the P L Account once again which will amount to double deduction. Disallowance of depreciation - discarding the furniture and remove the same from the block of asset - HELD THAT - As per the provisions of section 32(1)(iii) it is apparent that the amount of ₹ 4,758/- has to be removed from the block of assets and conversely treated as depreciation. It appears from the orders of the Ld. Revenue Authorities that they have only partially followed the provisions of the Act by excluding the amount of ₹ 4,758/- from the block of assets without granting depreciation of ₹ 4,758/- which is erroneous. Set aside the order of the Ld. CIT (A) on this issue and further direct the Ld. AO to grant depreciation of ₹ 4,758/- towards discarding the furniture and remove the same from the block of asset. While doing so, the Ld. AO shall also ensure that the same amount is not claimed as loss in the P L Account once again which will amount to double deduction. Addition towards Excise Duty levied on finished goods - HELD THAT - Opportunity should be provided to the assessee to establish before the Ld. Revenue Authorities that the assessee had not paid the Excise Duty for the unsold finished stock. Therefore, in the interest of justice, we hereby remit back the matter to the file of the Ld. AO to examine whether the assessee had not paid the Excise Duty for its finished closing stock and if found so delete the addition because in that case unpaid Excise Duty need not be added to the value of the finished closing stock of the assessee. If found otherwise, reinstate the order of the Ld. AO passed on the earlier occasion on the issue.

Summary

Issues:
1. Disallowance of expenditure claimed under "tools consumed" as capital expenditure.
2. Disallowance of expenditure claimed for land development as capital expenditure.
3. Deletion of amount from block of assets "building" without granting depreciation.
4. Deletion of amount from block of assets "furniture" without granting depreciation.
5. Addition of excise duty on finished goods to closing stock valuation.
6. Adjudication of penalty proceedings under section 271(1)(c) of the Act.

Issue 1 - Disallowance of Expenditure on Tools:
The Assessing Officer disallowed &8377; 3,25,182 claimed as expenditure on tools, treating it as capital expenditure. However, the ITAT disagreed, citing the principle of materiality. The ITAT found the disallowance unwarranted as the claimed expenditure was negligible compared to the total income and turnover of the assessee. The ITAT set aside the CIT(A)'s order and directed the AO to delete the addition and withdraw the depreciation benefit granted.

Issue 2 - Land Development Expenditure Disallowance:
The AO disallowed &8377; 3,49,000 claimed for land development as capital expenditure. The assessee withdrew this ground during the hearing. Consequently, this ground was dismissed.

Issue 3 - Deletion of Building from Block of Assets:
The AO deleted &8377; 17,38,711 from the block of assets "building" without granting depreciation, stating the building was demolished. The ITAT disagreed, citing Section 32(1)(iii) of the Act, directing the AO to grant depreciation for the demolished building and remove it from the block of assets to avoid double deduction.

Issue 4 - Deletion of Furniture from Block of Assets:
The AO deleted &8377; 4,758 from the block of assets "furniture" without granting depreciation, as the furniture was discarded. The ITAT disagreed, directing the AO to grant depreciation for the discarded furniture and remove it from the block of assets to prevent double deduction.

Issue 5 - Addition of Excise Duty on Finished Goods:
The AO added &8377; 3,24,180 for excise duty on finished goods to closing stock valuation. The ITAT remitted the matter back to the AO for verification, providing the assessee an opportunity to prove non-payment of excise duty on unsold finished stock.

Issue 6 - Penalty Proceedings Initiation:
The ITAT dismissed the ground raised by the assessee regarding the initiation of penalty proceedings under section 271(1)(c) of the Act, deeming it premature.

In conclusion, the ITAT partly allowed the assessee's appeal for statistical purposes, making detailed rulings on each issue raised during the proceedings.