BABUL PRODUCTS PVT.LTD.,AHMEDABAD vs. THE INCOME TAX OFFICER,WARD-1(1)(3), AHMEDABAD

The grounds of appeals of ITA Nos. 560, 561/Ahd/2016 are identical based on similar issues and facts, ground no. 2 of ITA No. 3537/Ahd/2016 is also identical to the grounds of appeals of ITA Nos. 560 & 561/Ahd/2016, therefore, for the sake of convenience, we take ITA No. 560/Ahd/2016 as a lead case and

The assessee has filed following grounds of appeal:- ITA No. 560/Ahd/2016 “1. The learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of depreciation of Rs.9,75,432/- made by the Assessing Officer being an amounts of depreciation of Rs.5,81,432/- claimed on factory building & of Rs.3,93,984/- claimed on furniture & fixture. 2. The learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of Rs.2,67,217/- made by the Assessing Officer out of electric Consumption expenses of Rs.3,27,217/- and allowing the same of Rs.60,000/- on estimations only. 3. The learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of Rs.21,90,440/- made by the Assessing Officer out of payment & provisions to employees. 4. The learned Commissioner of Income Tax (Appeals) has erred in holding that the business operation of the appellant has been discontinued since long and it has declared only income from other sources without considering the fact that the revenue has accepted the conducting of business operations.”

The return of income declaring income of Rs. 2,06,23,400/- was filed on 30th Sep, 2001. Thereafter, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the act on 1st August, 2012. The assessee was carrying on the business of manufacturing of chewing tobacco and sale thereof under the brand name “Babul & Janak”. However its activity has been discontinued for the last so many years. The further facts of the case are discussed under the different grounds of appeal.

On verification, the assessing officer noticed that assessee has claimed depreciation on factory building at Rs. 5,81,448/- and on furniture and fixture at Rs. 3,93,984/-. The assessing officer observed that assessee company had shown income from interest and dividend only, therefore, the claim of depreciation on factory building and furniture and fixture to the amount as mentioned above has been disallowed.

On appeal filed by the assessee, the ld. CIT(A) has confirmed the disallowance stating that no manufacturing activity has been carried during the year, therefore, he has disallowed the claim of depreciation stating that similar disallowance were made in assessment year 2008-09.

We have heard the rival contentions and perused the material on record carefully. It is undisputed facts that during the year under consideration, the assessee has derived income and dividend and no business activity has been carried out during the year. It is noticed that furniture and fixture has been used by the administrative staff located in the office premises of the assessee company. The furniture has been used by the employees in regard to accounting and office work which directly linked to earning of income from the other sources. We observe that as no business activity has been carried out, therefore, the factory building was not used for business purposes during the year under consideration. Considering the above facts and circumstances, we restrict the claim of depreciation of the assessee to the extent of furniture and fixture to the amount of Rs. 3,93,984/- and sustain the addition of depreciation on factory building to the amount of Rs. 5,81,448/-, therefore, the appeal of the assessee on this issue is partly allowed.

On scrutiny, the assessing officer has noticed that assessee has debited an amount of Rs. 3,27,217/- under the head electric consumption. The assessee explained that these electric expenses were the minimum electricity charges and there was no manufacturing activity carried out during the year under consideration. The assessing officer has not accepted the explanation of the assesee and restricted the expenditure on account of electricity to the amount of Rs. 60,000/-.

Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has sustained the disallowance in absence of any supporting document or evidences.

We have heard the rival contentions and perused the material on record carefully. We have noticed that assessee incurred minimum electricity expenditure of Rs. 3,27,217/- in order to keep electricity alive. It is noticed that even if the commercial production is not undertaken, the minimum electricity charges has to be paid. It is also noticed that electricity connection was kept alive and assessee has used premises for generating interest & dividend income during the year under consideration and the office premises was used by the administrative staff. During the course of appellate proceedings before us, the ld. counsel has also filed copy of bill of electricity which demonstrating that assessee has paid minimum electricity charges for keeping the electricity connection alive. In the light of above facts and circumstances, we find merit in the appeal on this issue of the assessee, therefore, the claim of the electricity expense is allowed. In the result, the ground of appeal of the assessee is allowed.

During the course of assessment proceedings, the assessing officer noticed that assessee has debited an amount of Rs. 26,90,440/- under the head payment and provisions for employees. The assessing officer observed that this claim of the assessee is not proper as the business operation of the assessee has been discontinued since long and the assessee has declared only income from other sources. The assessee explained that statement of three employees were recorded u/s. 131 of the act and they had admitted that they were rendering services for the performance of work of the assessee company during the year under consideration, therefore, there was no question of disallowing the salary expenses. The assessing officer has not accepted the explanation of the assessee stating that the factory and business operation of the assessee

We have heard the rival contentions and perused the material on record carefully. It is noticed that all the three employees whose statements were recorded had admitted that they were working for the assessee company. The assessing officer has not disproved that the staff members and employees were not employed and not rendered services to the assessee company during the year under consideration. The assessee has submitted the supporting details during the course of assessment proceedings claiming that the staff employees have rendered services on account of which it has earned income from other sources. Looking to the above facts and circumstances we observe that the assessing officer has made the disallowance only on estimated basis without disproving the claim of the assessee that employees and staff have rendered services during the year under consideration. However, we consider that employees have also rendered services to the other group concerns of the assessee, therefore, we are of the view that disallowance under the head payment for employees provision to the extent of 50% will be the reasonable. Therefore, we restrict the disallowance to the extent of Rs. 50% i.e. of Rs. 26,90,440/- under the head payment on provision of employees and allow the claim to the extent of Rs. 13,45,220/- In the result, the appeal of the assessee on this issue is partly allowed.

During the course of scrutiny assessment, the assessing officer noticed that assessee has claimed depreciation on motor car of Rs. 5,18,632/- and vehicle maintenance expenses of Rs. 3,55,572/-. He was of the view that use of such vehicle for personal cannot be ruled out, therefore, he has disallowed 1/5 on vehicle maintenance expenses to the amount of Rs. 1,74,840/- and added to the total income of the assessee.

In the appeal, the ld. CIT(A) has restricted the addition to the amount of Rs. 20,000/- on account of use of vehicle for personal purpose.

We have heard the rival contentions and perused the material on record carefully. We have noticed that assessee has made reference of decision of Hon’ble Gujarat High Court in the case of Sayaji Iron Engineering Co. (2002) 253 ITR 749 (Guj). It was stated that Hon’ble Gujarat High Court has clearly laid down that in the case of the assessee there cannot be any personal element which would justify the making of disallowance unlike in the partnership firm whether firm or partner virtually the same entity. However we consider that the facts in the case of the assessee are distinguishable from the referred case as in the case of the assessee the business operation has been closed down during the year under consideration. After considering the above we do not find any error in the decision of ld. CIT(A) and the appeal. Therefore the appeal of the assessee on this issue is dismissed.

In the combined result, two of the three appeals of the assessee are partly allowed and last one is dismissed as above.