2024 (11) TMI 1066 - AT - Income Tax

Disallowance of excess depreciation claimed on building relying on the provisions of section 50C - computation of the written down value (WDV) as per the provision of section 43(6)(c)(i)(B) - According to the assessee for computing written down value of the block of the assets, consisting building, the actual sale consideration in respect of an asset sold from the block of the asset should be reduced from opening WDV, whereas according to the Revenue, the notional sale consideration of the asset sold as prescribed u/s. 50C should be reduced from opening WDV. HELD THAT - We find that legislature has created the legal fiction u/s. 50C of the Act for the purpose of computing the capital gain on sale of capital assets. Similarly, while computing the profits and gains of the business, the legislature has introduced a legal fiction under section 43CA of the Act for substantiating the sale consideration by the Stamp Duty Value while transfer of an assets other than the capital asset, i.e., stock-in- trade, but no specific fiction has been created while computing deprecation on the block of the assets for substantiating the sale consideration by the Stamp Duty Valuation Authority. The present definition of the moneys payable therefore, cannot be construed as including as the Stamp Duty Valuation of the property and, therefore, the legal fiction for substantiating the sale consideration by the Stamp Duty Value created under either section 50 or section 43CA of the Act cannot be extended to section 32 of the Act for claiming depreciation on the block of the asset. In the instant case, the AO could have examined the applicability of section 41(2) for taxing the quantum of depreciation claimed on building in earlier years, which we don t know whether he had examined or not. The fiction of section 50C can t be extended to the facts of the case, accordingly, we set aside the finding of the ld. CIT(A) on the issue in dispute and we delete the disallowance made by the lower authorities. Ground no. 1 raised by the assessee in appeal is accordingly allowed. Disallowance of expenses - assessee submitted that it had already disallowed certain expenses appearing in the profit and loss account in computation of total income, but in absence of any details or supporting documents, the ld. A.O. disallowed 5% on ad-hoc basis - HELD THAT - Before us, assessee fairly agreed and submitted that details were not filed before the lower authorities, therefore, the matter should be restored back to the file of the ld. AO. We find that the assessee is willing to produce all the necessary evidence in support of the expenses claimed and the ld. DR did not object to the proposal of the ld. Counsel for the assessee - restore this matter back to the file of the ld. A.O. with the direction to the assessee to produce all the necessary documentary evidence/voucher in support of the voucher claimed for verification by the ld. A.O. and, thereafter the A.O. shall decide the issue in accordance with the law. Ground no. 2 raised by the assessee in appeal is accordingly allowed for statistical purpose.

Summary

Issues Involved:

1. Disallowance of depreciation of Rs. 71,94,901/- under Section 50C of the Income Tax Act, 1961.
2. Disallowance of expenses amounting to Rs. 89,03,154/- on an ad-hoc basis.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation under Section 50C:

The primary issue was whether the provisions of Section 50C, which substitutes the sale consideration with the stamp duty valuation for computing capital gains, could be applied to determine the written down value (WDV) for claiming depreciation on a block of assets. The assessee sold a factory building for Rs. 2,45,00,000/-, but the stamp duty valuation was Rs. 9,76,75,509/-. The assessee claimed depreciation based on the actual sale consideration, but the Assessing Officer (A.O.) substituted the sale consideration with the stamp duty value, leading to a disallowance of excess depreciation of Rs. 71,94,901/-.

The CIT(A) upheld the A.O.'s decision, interpreting that the "moneys payable" should include the stamp duty valuation as per Section 50C. However, the Tribunal found that Section 50C's legal fiction is limited to computing capital gains and cannot be extended to depreciation calculations under Section 43(6). The Tribunal referenced the Supreme Court's stance that legal fictions should not be extended beyond their intended purpose. Consequently, the Tribunal ruled in favor of the assessee, allowing the depreciation claim based on the actual sale consideration and not the stamp duty valuation.

2. Disallowance of Expenses on an Ad-hoc Basis:

The second issue involved the disallowance of Rs. 89,03,154/- on an ad-hoc basis due to the lack of supporting documents for various expenses claimed by the assessee. The A.O. disallowed 5% of the total expenses claimed, citing insufficient documentation. The CIT(A) upheld this disallowance, noting the absence of invoices and bank statements to verify the genuineness of the expenses.

During the Tribunal proceedings, the assessee's counsel acknowledged the lack of documentation and requested an opportunity to present the necessary evidence. The Tribunal decided to remand the matter back to the A.O., allowing the assessee to submit the required documents for verification. The Tribunal directed the A.O. to reassess the expenses in accordance with the law after considering the new evidence.

Conclusion:

The appeal was allowed for statistical purposes, with the Tribunal ruling in favor of the assessee on the depreciation issue and remanding the expense disallowance issue back to the A.O. for further examination.