ACIT., CIRCLE-5(1), HYDERABAD vs. MARIGOLD APPAREL INDUSTRIES PRIVATE LIMITED, HYDERABAD

Thereafter, the AO framed the assessment vide his order passed under Section 143(3) r.w.s. 144B of the Act, dated 22.04.2021, determining the income of the assessee company at Rs.91,60,000/- (sic) after making certain additions/disallowance, viz.(i) disallowance of assessee’s claim of depreciation: Rs.94,24,394/-; (ii) treating of the unsecured loans received by the assessee company as unexplained cash credits under Section 68 of the Act: Rs.91,60,000/- ; and (iii) disallowing of interest expenditure claimed in relation to the said unsecured loans: Rs.13,74,000/-.

Aggrieved, the assessee company carried the matter in appeal before the CIT(A). The CIT(A), after considering the submissions of the assessee company, confirmed the disallowance of depreciation. However, in respect of the addition made under Section 68 of the Act and the consequential disallowance of interest expenditure, the CIT(A) accepted the assessee's explanation that owing to the Covid-19 pandemic the requisite details could not be furnished before the AO during the course of assessment proceedings. The CIT(A), taking note of the additional evidence filed before him, viz. the names and addresses of the creditors,

The Ld. Senior Departmental Representative (for short, "DR") assailed the order of the CIT(A), and submitted that after the amendment to Section 251(1)(a) of the Act, the CIT(A) no longer possesses the power to set aside an assessment or remand an issue to the AO except in the circumstances specifically provided by the statute. Elaborating on his contention, the Ld. AR submitted that as the assessment in the present case had admittedly been framed under Section 143(3) r.w.s. 144B of the Act and not under Section 144 of the Act, therefore, the action of the CIT(A) in setting aside the addition made by the AO under Section 68 of the Act, as well as the consequential disallowance of interest expenditure to the file of the AO, was wholly without jurisdiction. It was further submitted that once the CIT(A) had admitted additional evidence, the proper course available to him was to call for a “remand report” from the AO under Rule 46A of the Income-tax Rules, 1962, examine the evidence and thereafter adjudicate the issues himself in exercise of his appellate jurisdiction. Carrying his contention further, the Ld. DR submitted that the CIT(A) having failed to do so, the impugned order so passed by him to that extent deserves to be set aside.

Per contra, Shri A.V. Raghuram, the learned Authorized Representative (for short, "Ld. AR") for the assessee company supported the order of the CIT(A)

We have heard the Ld. Authorized Representatives of both parties, perused the orders of the authorities below as well as the material available on record, and considered the judicial pronouncements pressed into service by the Ld. AR to drive home his contentions. As the grounds raised by the Revenue and the Cross Objections filed by the assessee company arise out of the same appellate order, they are being taken up and disposed of by this consolidated order.

As observed hereinabove, the primary grievance of the Revenue is that the CIT(A), after taking note of the additional evidences filed by the assessee company during the appellate proceedings, instead of adjudicating the issues on merits, had wrongly restored the addition made under Section 68 of the Act amounting to Rs.91,60,000/- and the consequential disallowance of interest expenditure amounting to Rs.13,74,000/- to the file of the AO. According to the

On a perusal of the impugned order, we find that the CIT(A) had observed that the assessee had furnished before him the names and addresses of the creditors, copies of their bank statements and copies of their returns of income, explaining that the said evidence could not be produced before the AO during the assessment proceedings owing to the disruption caused by the Covid-19 pandemic. We find that the CIT(A), having taken note of the aforesaid material, instead of examining the same himself or calling for a “remand report” from the AO, proceeded to restore the aforesaid issues to the file of the AO for fresh verification and adjudication.

We find considerable merit in the Ld. DR’s contention that Section 251(1)(a) of the Act empowers the CIT(A), while disposing of an appeal against an order of assessment, to confirm, reduce, enhance or annul the assessment. As stated by the Ld. DR, and rightly so, the power to set aside an assessment, which was available under the unamended provisions, was withdrawn by the Finance Act, 2001 with effect from 01.06.2001. Subsequently, by virtue of the “1st proviso” to Section 251(1)(a) of the Act, inserted by the Finance (No.2) Act, 2024 with effect from 01.10.2024, a limited power has been conferred upon the CIT(A) to set aside an assessment and refer the case back to the AO only where the assessment order under appeal has been passed under section 144 of the Act.

Admittedly, the assessment in the present case was framed under Section 143(3) r.w.s. 144B of the Act and not under section 144 of the Act. Therefore, the case does not fall within the scope and ambit of the aforesaid “1st proviso” of Section 251(1) of the Act. In our view, once the CIT(A) considered the additional evidences filed before him, the course open to him was either to decide the issues himself on the basis of the material available on record or, if he considered it necessary, to call for a “remand report” from the AO in accordance with Rule 46A of the Income-tax Rules, 1962 and thereafter adjudicate the appeal on merits. In our considered view, the CIT(A) could not have exceeded the statutory appellate jurisdiction vested in him by simply restoring the matter to the file of the AO.

We, thus, in the backdrop of our aforesaid observations, are of a firm conviction that the impugned order of the CIT(A), to the extent he had restored the issues relating to the addition made under Section 68 of the Act and the consequential disallowance of interest expenditure to the file of the AO, cannot be sustained, and, thus, set aside the same. However, since the CIT(A) has not adjudicated either of the aforesaid issues on merits, we consider it apposite, in the interest of justice, to restore the matter to his file for fresh adjudication in accordance with law. The CIT(A) is directed to examine the additional evidence filed by the assessee company in accordance with Rule 46A of the Income-tax Rules, 1962 and, if considered necessary, call for a “remand report” from the AO

We shall now advert to the Cross Objections filed by the assessee company challenging the confirmation of the disallowance of depreciation amounting to Rs.94,24,394/-.

Shri A.V. Raghuram, the Learned Authorized Representative (for short, “Ld. AR”) for the assessee company, submitted that though the assessee-company could not carry on any manufacturing activity during the year under consideration owing to a severe slump and recession in the textile industry, the same could not constitute a valid ground for disallowing its claim of depreciation under Section 32 of the Act. Elaborating on his submission, the Ld. AR submitted that the assessee company had only temporarily suspended its manufacturing operations because of heavy losses arising from adverse market conditions and had not permanently discontinued its business. It was submitted that the plant and machinery continued to remain installed at the factory premises and were kept ready for use so that manufacturing activity could be resumed immediately upon receipt of commercial orders. According to the Ld. AR, since the machinery had neither been dismantled nor removed from its place of installation, the assets were in a state of passive use and, therefore, the assessee company was entitled to depreciation under section 32 of the Act notwithstanding the absence of actual production during the year. In support of his aforesaid contention, the Ld. AR

We have given thoughtful consideration to the contentions advanced by the Ld. Authorized Representatives of both parties on the subject issue, i.e., entitlement of the assessee company towards its claim for depreciation. We find that the AO had disallowed the assessee's claim of depreciation primarily on the ground that no manufacturing activity had been carried on during the relevant year and that there were no purchases or sales. The AO was further of the view that the assessee company had failed to establish that the assets had been put to use for business purposes during the year under consideration. The CIT(A) concurred with the aforesaid view and observed that, apart from relying upon certain judicial precedents, the assessee company had not produced any material to demonstrate

We find that the principal contention of the Ld. AR before us is that the manufacturing activity had not been permanently discontinued but had only remained suspended because of adverse market conditions prevailing in the garment industry and that the plant and machinery had all along remained installed and ready for use. In support of the aforesaid proposition, the Ld. AR had placed reliance on the judgments of the Hon'ble High Court of Delhi in CIT v. Yamaha Motor India (P.) Ltd. (supra) and CIT v. Refrigeration & Allied Industries Ltd. (supra), wherein it has been held that the expression "used for the purposes of business" occurring in Section 32 of the Act is capable of a wider interpretation and would, in appropriate cases, include passive user where the assets are kept ready for use.

We find considerable force in the legal proposition canvassed by the Ld. AR. It is fairly well settled that actual user is not the sole test for allowability of depreciation and that, in appropriate factual circumstances, depreciation may be allowed even where the assets are kept ready for use and the business has only temporarily remained suspended. However, whether the facts of a particular case satisfy the test of passive user is essentially a question of fact to be determined on the basis of the evidence available on record.

We are of the view that as we have already restored the issues relating to the addition under Section 68 of the Act and the consequential disallowance of interest expenditure to the file of the CIT(A) for fresh adjudication, therefore, in the backdrop of our aforesaid deliberations, the issue relating to the allowability of depreciation in all fairness and interest of justice should also be restored to his file with a direction to re-adjudicate the same afresh after examining the same in the light of the principles governing passive user, as had been looked into by the Hon’ble High Court of Delhi in CIT v. Yamaha Motor India (P.) Ltd. (supra) and CIT v. Refrigeration & Allied Industries Ltd. (supra), and such other binding judicial precedents as may be applicable. The CIT(A) shall for adjudicating the aforesaid issue be at liberty to call for a “remand report” from the AO, if

In the result, the appeal filed by the Revenue and the Cross Objections filed by the assessee company are allowed for statistical purposes in terms of our aforesaid observations.