2021 (10) TMI 737 - AT - Income Tax

Disallowance of depreciation - no business activity was carried out by the assessee company - none of the assets were used at any time during the previous year for the purposes of business of the assessee company - as per assessee business was temporarily shut down due to heavy losses - HELD THAT - We find force in the submissions of assessee that when the AO allowed the assessee's claim of depreciation in AY 2013-14, he could have allowed in the impugned AY by taking into consideration the judicial consistency. We observe from the paper books filed by the assessee that the company has stopped its production/trading activities since 2010 but still in existence. Since in the eyes of law, the company is an artificial jurisdictional entity, it has to maintain its existence unless it gets dissolved under the companies Act. The Fixed Assets are still lying in the control of the assessee and we observe from the paper book that the company is trying to revive its business and gone for one time settlement, it shows that the business was temporarily shut down due to heavy losses The use of individual asset for the purpose of business may be examined only in the first year when the asset was purchased and put to use but not in the subsequent years, when use of block of assets is to be examined, existence of individual asset in block of assets itself amounts to use for the purpose of business. Once an asset is included in the block of assets, it remains in block for its entire line. See INTEGRATED TECHNOLOGIES LTD. 2011 (12) TMI 48 - DELHI HIGH COURT wherein held that the only condition is that the business should not have been closed down once for all and that the assessee should demonstrate that the hopes of the business being revived are alive and real. It is however not a matter that can turn entirely on the assessee's hopes alone. There should be evidence or material to show that the assessee took efforts to keep the business alive in the hope of reviving the same. Maintaining the office and establishment, complying with the statutory formalities, not disposing of the plant and machinery, incurring expenses on the repair of plant and machinery etc., are some of the indications of nurturing the hopes of reviving the business. The above are only illustrative instances and are by no means exhaustive and the question as to whether the assets were kept ready for use in the business is largely to be decided on the facts and circumstances of each case. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation by the Assessing Officer (AO) and confirmation by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Whether the assets were used for business purposes to qualify for depreciation.
3. Application of judicial consistency in allowing depreciation.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation:
The primary issue in this case is the disallowance of depreciation amounting to ?6,13,14,399/- by the AO, which was subsequently confirmed by the CIT(A). The AO observed that the assessee company had no business activity from the year 2010 onwards and hence proposed to disallow the depreciation claimed. The assessee argued that although business operations were suspended temporarily due to adverse conditions, efforts were made during the year under consideration to refurbish the plant and machinery, indicating an intention to resume operations.

2. Use of Assets for Business Purposes:
The AO's disallowance was based on the interpretation of Section 32(1) of the Income Tax Act, which allows depreciation only if the asset is used for business purposes during the year. The AO noted that since the company had no business activity and the assets were not used in the previous year, the depreciation claim was not valid. The CIT(A) upheld this decision, agreeing with the AO's assessment.

3. Judicial Consistency:
The assessee contended that the AO had allowed depreciation in the Assessment Year (AY) 2013-14 under similar circumstances and that judicial consistency should apply. The assessee cited several case laws to support the claim that even passive use of assets (keeping them ready for use) qualifies for depreciation.

Tribunal's Findings:
The Tribunal found merit in the assessee's argument regarding judicial consistency. It was observed that the company, despite suspending operations, was still in existence and had made efforts to revive its business. The Tribunal referred to the Delhi High Court's judgment in CIT Vs. Integrated Technologies Ltd., which supported the view that passive use of assets qualifies for depreciation. The Tribunal noted that the company had incurred expenses to keep the business alive, such as salaries and maintenance, indicating an intention to resume operations.

Conclusion:
The Tribunal concluded that the AO should have allowed the depreciation claim for the impugned AY, considering the judicial consistency and the fact that the company was making efforts to revive its business. The Tribunal set aside the CIT(A)'s order and directed the AO to allow the depreciation claim of ?6,13,14,399/-. The appeal filed by the assessee was allowed in these terms.

Pronouncement:
The judgment was pronounced in the open court on 8th October 2021, allowing the assessee's appeal.