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2020 (10) TMI 609 - AT - Income Tax


Issues Involved:
1. Claim of depreciation on residential property.
2. Claim of depreciation on scooter purchased in the name of a partner.
3. Inclusion of interest on FDRs for calculating allowable remuneration to partners under Section 40(b).
4. Direction to initiate penalty proceedings under Section 271(1)(c) for ad-hoc disallowances of expenses.

Issue-wise Detailed Analysis:

1. Claim of Depreciation on Residential Property:
The assessee claimed depreciation on a property described as residential in the sale deed. The Pr. CIT challenged this, stating the property was not converted for commercial use and was not used for business purposes. The assessee provided photographs and argued the property was used as a godown and office. The Tribunal found that the AO did not conduct adequate enquiries into the actual usage of the property, thus making the assessment order erroneous and prejudicial to the interest of the Revenue. The Tribunal upheld the Pr. CIT's finding, emphasizing the need for thorough verification of property usage for business purposes to justify depreciation claims.

2. Claim of Depreciation on Scooter:
The scooter was purchased in the name of a partner but claimed as an asset of the firm. The Pr. CIT noted the lack of enquiry by the AO regarding the ownership and business use of the scooter. The Tribunal agreed, stating that the AO should have examined the ownership and usage of the scooter to determine the firm's eligibility to claim depreciation. The Tribunal upheld the Pr. CIT's finding, indicating a lack of enquiry on the AO's part.

3. Inclusion of Interest on FDRs for Calculating Allowable Remuneration to Partners under Section 40(b):
The assessee included interest on FDRs as business income for calculating partners' remuneration. The Pr. CIT contended that the interest income should be classified under "Income from Other Sources" and not included in business income. The Tribunal found that the AO did not verify the purpose of the FDRs and their relevance to business operations. The Tribunal upheld the Pr. CIT's finding, noting the absence of enquiry and investigation by the AO regarding the inclusion of interest on FDRs in business income.

4. Direction to Initiate Penalty Proceedings under Section 271(1)(c) for Ad-hoc Disallowances of Expenses:
The Pr. CIT directed the AO to initiate penalty proceedings for ad-hoc disallowances of expenses. The assessee argued that mere disallowance of expenses does not warrant penalty proceedings. The Tribunal noted that the Pr. CIT did not explicitly direct the initiation of penalty proceedings in the show-cause notice. The Tribunal found no infirmity in the Pr. CIT's observation that the AO failed to enquire into and identify inadmissible expenses, making the assessment order erroneous.

Conclusion:
The Tribunal upheld the Pr. CIT's order, finding that the AO's assessment was erroneous and prejudicial to the interest of the Revenue due to a lack of enquiry and investigation into the matters raised. The Tribunal directed the AO to make fresh enquiries and investigations, providing a reasonable opportunity to the assessee. The appeal by the assessee was dismissed with these directions.

 

 

 

 

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