THE ITO,COR.WD-1, KOCHI vs. BHAGHEERATHA ENGINEERING LIMITED, COCHIN

Per CHANDRA POOJARI, AM:

These appeals filed by the Revenue are directed against the different orders

passed by the CIT(A)-I, Kochi dated 16/08/2018 and pertain to the assessment

years 2006-07 and 2007-08. Since the issues involved in these appeals were

common, they were heard together and are being disposed of by this common

order.

I.T.A. Nos.500&501/Coch/2018 2. The learned Commissioner of Income-tax(Appeals) is not justified to delete the disallowance of claim of bad debts. The CIT(A) has accepted additional evidence during the appellate proceedings without giving reasonable opportunity to the Assessing Officer for examining the additional evidence which is against Rule 46A of the IT rules, 1962. The CIT(A) ought to have considered the judgment of High Court of Delhi in the case of CIT vs. Manish Buildwell P. Ltd. (ITA No.928/2011). Hence it is submitted that the Hon’ble Tribunal may restore the matter back to CIT(A) with a direction to comply with Rule 46A.

depreciation on machinery and vehicles.

3.1 Since the facts are similar in both the appeals, we shall consider the facts as

narrated in ITA No. 500/Coch/2018. The Assessing Officer noticed that in the

relevant previous year, some machinery and vehicles were under custody of clients

and financiers because of the termination of some projects and default on the part

of the assessee to pay its dues towards financiers. The assessee claimed

depreciation on these equipments. As per section 32(1) of the I.T. Act, for claiming

depreciation, the asset should be owned by the assessee wholly or partly and

should be used for the purposes of the business. The Assessing Officer found that

in the previous year, these assets were under the custody of

bankers/financiers/clients, therefore, these assets were not owned by the assessee.

Hence, the Assessing Officer disallowed excess depreciation of Rs.56,65,759/- on

these assets.

in question are undisputedly owned by the assessee and temporary suspension of 2

I.T.A. Nos.500&501/Coch/2018 work shall not disentitle the assessee to claim depreciation. According to the

CIT(A), depreciation is granted on the concept of block of assets. Hence, the CIT(A)

held that the assessee is entitled for depreciation.

that machinery and vehicles were under custody of bankers/financiers because of

the termination of some projects and default on the part of the assessee to pay its

dues towards financiers. However, the assessee claimed depreciation on the assets

on the ground that it was having control on them as per section 32(1) of the Act

which is not correct.

temporarily because of the non payment of dues to the financiers. It was submitted

that the assessee had no control over these assets. The contention of the Ld. AR

was that these assets were ready to use but these could not be used due to

temporary suspension of work. According to the Ld. AR, active or passive use of

assets for the purpose of business will be treated as ‘put to use’ and will qualify for

the depreciation allowance. The Ld. AR submitted that in case of block of assets, in

order to allow assessee’s claim u/s. 32(1), use of individual asset for purpose of its

business can be examined only in first year when assessee is purchased and

subsequent year use of block of assets is to be examined. It was submitted that

existence of an individual asset in block of assets itself amounts to use for purpose

of business and therefore, depreciation is allowable on it, even though the said

I.T.A. Nos.500&501/Coch/2018 asset was not actually used in course of business during relevant assessment year.

The Ld. AR relied on the following case laws:

1) Whittle Enderson Ltd. vs. CIT (79 ITR 613)

2) CIT vs. Khanna & Sons (148 ITR 558)

3) CIT vs. Suhrid Gegy Ltd. (133 ITR 884)

4) Swati Synthetics Ltd. vs. ITO (38 SOT 208) (Mum.)

assessee has to prove the ownership as well as having physical possession of the

said machinery and vehicles. The argument of the Ld. AR does not support that the

assessee physically owned and was having control of the said machinery and

vehicles. In our opinion, it is appropriate to remit the issue to the file of the

Assessing Officer to examine owning and having physical control of the machinery

and vehicles. The Assessing Officer shall grant depreciation on the assets only if

the assessee is having physical control of the assets. If the assessee is not in

physical control of the assets, the assessee is not entitled for depreciation as the

assessee cannot use the assets without having physical control and possession of it.

Thus, this issue is remitted to the file of the Assessing Officer for fresh consideration

for both the assessment years. Hence, this ground of appeals of the Revenue is

allowed for statistical purposes.

debts.

I.T.A. Nos.500&501/Coch/2018

advances paid to sub-contractors amounting to Rs.1,23,10,396/- were written off

and claimed as bad debts as provided u/s. 36(1)(vii) of the Act. However,

according to the Assessing Officer, no such write-off is admissible u/s. 36(2)(i) of

the I.T. Act. Before the Assessing Officer, the assessee submitted that the sub

contractors who owed large sums of money to the company could not be traced and

in such cases, the company had no other way but to write off such irrecoverable

advances paid for the purpose of business of the assessee. The assessee submitted

that if the bad debts are not allowed u/s. 36 of the Act, it should be allowed u/s. 37

of the Act. The Assessing Officer held that bad debts cannot be allowed u/s.

36(i)(vii) because of the applicability of 36(2)(i) of the Act. Moreover, bad debts

cannot also be allowed u/s. 37 of the Act because u/s. 37 only expenditure can be

considered for allowability. In the present case, it was merely an advance and not

expenditure. The Assessing Officer also noticed that the assessee has not shown

what steps had been taken to recover all these advances and without establishing

the genuineness and identity of the sub-contractors, the bad debts cannot be

allowed u/s. 37 also.

connected with the assessment year 2006-07 and the amount related to the

assessment year 2007-08. Considering the above submission, the CIT(A) held that

I.T.A. Nos.500&501/Coch/2018 since no write off was done, the same cannot be disallowed and deleted the

disallowance of bad debts.

of the Ld. AR is that the assessee has not at all claimed bad debts of

Rs,1,23,10,396/- for the assessment year 2006-07. Hence, the CIT(A) decided the

issue in favour of the assessee. In the subsequent year, the same amount of bad

debts was claimed by the assessee as bad debts which was allowed by the

authorities. In our opinion, if the bad debts was actually written off, the same is to

be allowed in one of the assessment year concerned and the same amount cannot

be allowed for both the assessment years. On going through the computation

statement of income for the assessment year 2006-07, we find that there was a

claim of provision for doubtful receivables which was reduced from loss of that

assessment year . However, the Ld. AR was not able to explain whether the said

amount of Rs.1,23,10,396/- was included in this provision of bad and doubtful

debts. Hence, we are not in a position to express any opinion on it. Accordingly,

we remit this issue to the file of the Assessing Officer for fresh consideration for

both the assessment years. Thus, this ground of appeals of the Revenue is allowed

for statistical purposes.

I.T.A. Nos.500&501/Coch/2018 13. In the result, the appeals filed by the Revenue are partly allowed for statistical

purposes. Order pronounced in the open Court on this 3rd April, 2019

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 3rd April, 2019 GJ Copy to: 1. M/s. Bhageeratha Engineering Ltd., Bhageeratha Residency, Banerji Road, Kochi-18. 2. The Income Tax Officer, Corporate Ward-1(1), Kochi. 3. The Commissioner of Income-tax(Appeals)-I, Kochi. 4. The Pr. Commissioner of Income-tax, Kochi. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin