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Facts
The assessee, a partnership firm, filed an appeal against the CIT(A)'s order concerning assessment year 2017-18. The primary issues involved disallowance of depreciation on a building and addition of cash deposits made during demonetization as unexplained income.
Held
The Tribunal held that the assessee, having possession, control, and dominion over the building, is considered its owner for depreciation purposes, even without a registered sale deed. Regarding demonetized currency deposits, the Tribunal found that the assessee provided a genuine explanation of cash sales, and merely violating RBI guidelines did not automatically make the deposit unexplained income.
Key Issues
Whether the assessee can claim depreciation on a building without a registered sale deed, and whether cash deposits made in demonetized currency from sales are to be treated as unexplained income.
Sections Cited
32, 40(a)(ia), 69, 143(2), 143(3), 270A, 271AAC(1)
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Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
(निर्धारण वर्ा/Assessment Year:2017-18) M/s. Kisan, Asst. Commissioner of Income Tax, Vs. Circle-1, Nizamabad. Nizamabad. PAN:AAQFK5985J (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri A. Srinivas, C.A. रधजस् व द्वधरध/Revenue by: Shri Srinath Sadanala, SR-DR सुिवधई की तधरीख/Date of hearing: 29/04/2025 घोर्णध की तधरीख/Pronouncement: 19/05/2025 आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M. : This appeal is filed by M/s. Kisan (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”), dated 16.10.2023 for the A.Y. 2017-18.
At the outset, it is seen that, there is a delay of 12 days in filing of this appeal for which the assessee has filed a condonation petition along with affidavit explaining the reasons for such delay. After considering the contents of the condonation petition and after hearing the Learned Department Representative (“Ld. DR”), the delay of 12 days in filing of this appeal is condoned and the appeal is admitted for adjudication.
The assessee has raised the following grounds of appeal :
The brief facts of the case are that, the assessee is a partnership firm engaged in the business of textiles, filed its Return of Income (“ROI”) for A.Y. 2017-18 on 06.11.2017 declaring total income of Rs.35,02,000/-. The assessee was constituted as a new partnership firm w.e.f. 01.06.2016 comprising of 8 partners. Prior to this, all these 8 partners were also partners in 4 different partnership firms (“old firms”) in different combination, the details of which are placed at note nos.3 & 4 at page nos.6 & 7 of the order of Learned Assessing Officer (“Ld. AO”) which is to the following effect :
“3. These 8 partners were carrying on business in 4 different firms having among themselves common partners and all the eight partners belong to the same family.
4.1 In order to have better business efficiency, old firms were closed on 31.05.2016 and the assessee firm was constituted w.e.f. 01.06.2016. On closure of the old firm, the assets and liabilities of the erstwhile firms were taken over by the assessee firm. The case of the assessee was selected for scrutiny and notice u/s.143(2) of the Income Tax Act, 1961 (“the Act”) was issued on 28.08.2018. After considering the submissions of the assessee, the Ld. AO completed the assessment u/s.143(3) on 30.12.2019 by making addition of Rs.1,09,32,958/- in the hands of the assessee. On appeal to Ld. CIT(A), the Ld. CIT(A) partly allowed the appeal of the assessee.
Aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. At the outset, the Learned Authorised Representative (“Ld. AR”) submitted that, the ground nos.1 & 6 are general in nature and the assessee is not pressing ground nos. 4 & 5. Therefore, ground nos.1 & 4 to 6 are not required to be adjudicated separately. Accordingly, ground nos.1 & 4 to 6 are dismissed, being not pressed.
Ground no.2 of the assessee is related to disallowance of depreciation of Rs.9,21,953/-. The Ld. AR submitted that, on closure of old firms, the assets and liabilities of the erstwhile firms were taken over by the assessee firm. Among the assets transferred, the buildings which were originally constructed by two of the old firms viz. M/s. Kisan Cloth Emporium and M/s. Aakruti were also transferred to the assessee. During the relevant A.Y., the assessee claimed depreciation of Rs.9,21,953/- on the said building u/s.32(1) of the Act. However, the Ld. AO disallowed the claim of depreciation on the ground that the assessee was not the owner of the building as the transfer of the building was not made through a registered sale deed. Therefore, the assessee cannot be treated as owner of the building for the purpose of section 32 of the Act. The observation of the Ld. AO with regard to such disallowances are placed at note nos.6.2 and 6.3 of page nos.8, 9 & 10 of the order of Ld. AO, which is to the following effect :
Aggrieved with the order of Ld. AO, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) affirmed the disallowance made by the Ld. AO following the same reasons.
Aggrieved with the order of Ld. CIT(A), the assessee is in appeal before Tribunal. Before us, the Ld. AR submitted that, the old erstwhile firms were closed and all their assets and liabilities were taken over by the assessee w.e.f. 01.06.2016. The assessee had continued the same business activity and had taken over all the business assets including the building in question. Although there was no registered sale deed, physical possession, control and uses of the building were with the assessee. It was also submitted that, for the purpose of section 32 of the Act, the assessee need not be a legal owner, but must be the beneficial owner i.e. the person who exercised the control over the assets and uses the assets in the course of business. In support of their argument, the Ld. AR relied on the decision of Hon'ble Supreme Court in the case of Mysore Mineral Limited Vs. CIT (1999) 239 ITR 775 (SC) and submitted that, the Hon'ble Supreme Court has held that, the intention of the legislature in enacting the section 32 would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. The Ld. AR also relied on the decision of Hon'ble Supreme Court in the case of Dalmia Cement (Bharat) Ltd. Vs. CIT (2001) 247 ITR 267 (SC) and submitted that, the Hon'ble Court relying on the decision of Mysore Mineral Limited Vs. CIT (supra), held that any one in possession of property in his own title exercising such dominion over property as would enable others being excluded therefrom and having right to use the property and enjoy its usufruct in his own right would be owner of buildings though formal deed of title may not have been executed and registered, he could claim depreciation in respect of such property. Accordingly, the Ld. AR submitted that, even if the building has not been got registered in the name of the assessee, for all purposes, the assessee is owner of the building and is eligible for depreciation u/s.32 of the Act.
Per contra, the Ld. DR relying on the order of the revenue authorities argued that, the registered ownership document was absent in this case. He further submitted that, in absence of a registered sale deed, the assessee cannot be treated as the legal owner and thus depreciation is not allowable to the assessee. Accordingly, the Ld. DR submitted that, there is no infirmity in the order of revenue authorities.
We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. There is no dispute about the fact that all the old firms closed their business on 31.05.2016. It is also not disputed that the assessee was constituted w.e.f. 01.06.2016 and taken over all the assets and liabilities of the old firms. It is also a fact that the building in question, were being used by the assessee for the purpose of its business. The only dispute before us is that, whether the assessee can be treated as owner of the building for the purpose of claiming depreciation u/s.32(1) of the Act in absence of a registered document of transfer. We have gone through the decision of Hon'ble Supreme Court in the case of Mysore Mineral Limited Vs. CIT (supra), wherein at para no.14, the Hon'ble Supreme Court has held as under :
10.1 On perusal of above, we found that, the Hon'ble Supreme Court has held that, the intention of the legislature in enacting section 32 would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. We have also gone through the decision of Hon'ble Supreme Court in the case of Dalmia Cement (Bharat) Ltd. Vs. CIT (supra) and found that the Hon'ble Supreme Court in this case has followed it’s decision of Mysore Minerals Ltd. Vs. CIT (supra). Hence once again, the Hon'ble Court has confirmed that, any one in possession of property in his own title exercising such dominion over property as would enable others being excluded therefrom and having right to use the property and enjoy its usufruct in his own right would be owner of buildings, though formal deed of title may not have been executed and registered, he could claim depreciation in respect of such property.
10.2 On perusal of both the decisions of Hon'ble Supreme Court (supra), we are of the opinion that, for the purpose of section 32 of the Act, the term ‘ownership’ must be assigned a wider meaning. A person, who, is in possession of property and uses the assets for his business can be regarded as owner for claiming depreciation. Further, the word ‘owner’ should not necessarily confined to title ownership, but the beneficial ownership and possession are sufficient. Thus, beneficial ownership of property used for business is sufficient for claiming depreciation.
10.3 In the present case, the assessee has taken over the building, has exercised possession, control, dominion and uses the building for the purpose of business. Therefore, in our opinion, the substantial conditions for claiming depreciation have been satisfied by the assessee. Further, the mere absence of registered sale deed under these peculiar facts, cannot defeat the claim for depreciation. Therefore, we find merits in the contention of the Ld. AR and delete the disallowance of depreciation of Rs.9,21,953/-. Accordingly, the ground no.2 of the assessee is allowed.
Ground no.3 of the assessee is related to addition of Rs.80,01,400/- u/s.69 of the Act. In this regard, the Ld. AR submitted that, during the demonetisation period i.e. from 10.11.2016 to 30.12.2016, the assessee had deposited cash of Rs.1,71,16,000/- into its bank account, in Specified Bank Notes (“SBNs”) of Rs.500/- and Rs.1000/- denomination, which had been declared invalid as legal tender by the Notification of the Government of India w.e.f. 09.11.2016. During the assessment proceedings, the Ld. AO called explanation regarding source of deposits of cash of Rs.1,71,16,000/- in SBNs. In their submission, the assessee submitted that, they had closing cash balance of Rs.91,14,650/- as on 08.11.2016 and the balance amount of Rs.80,01,350/- rounded off to Rs.80,01,400/-, were sourced from cash sales made during the demonetisation period in SBNs. The Ld. AO only accepted the closing cash balance of Rs.91,14,650/- as on 08.11.2016 as explained source and did not accept the explanation given by the assessee with regard to deposit of Rs.80,01,350/- out of cash sales during demonetisation in SBNs. Accordingly, the Ld. AO made the addition of Rs.80,01,400/- in the hands of the assessee as unexplained income u/s.69 of the Act. The observation of the Ld. AO with regard to the addition so made are placed at para nos.7 to 7.5 of the order of Ld. AO which is to the following effect :
Aggrieved with the order of Ld. CIT(A), the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) dismissed the appeal of the assessee upholding the reason given by the Ld. AO.
Aggrieved with the order of Ld. CIT(A), the assessee is in appeal before the Tribunal. The Ld. AR submitted before us that, the assessee had collected the SBNs during demonetisation period which were properly recorded by the assessee in their cash book. Further, the cash sales made during the period were supported by proper sales bills and the assessee had included the sales in its VAT return and paid the appropriate amount of VAT. No discrepancy in its VAT return has been pointed out by the sales tax department. The Ld. AO also did not find any discrepancy in the cash book, sales invoices or the books of account of the assessee. The Ld. AR further submitted that, the Ld. AO merely relied on the facts that receipt of SBNs was prohibited after 08.11.2016, but did not dispute the genuineness of the sales transactions recorded by the assessee. It was further submitted that, even if acceptance of old currency note was restricted by RBI Circular, Income Tax treatment should be based on actual receipt and not on the legality of the transaction. In support of their argument, the Ld. AR invited our attention to para no.11 of the order of the co-ordinate bench of the Tribunal in the case of ITO Vs. Surabii Gold in for A.Y. 2017-18 dated 05.04.2024 and submitted that, in the said case, the Tribunal has held that merely for the reason that there is a violation of certain notification / G.O. issued by the Government in transacting with SBNs, the genuine explanation offered by the assessee towards source of cash deposit cannot be denied unless the Ld. AO makes a case that the assessee has deposited cash into bank in SBNs out of unexplained source. Finally, the Ld. AR submitted before the bench to delete the addition made by the Ld. AO.
Per contra, the Ld. DR relied heavily on the orders of revenue authority and submitted that, after 08.11.2016, the acceptance of SBNs was prohibited by the government. Therefore, the explanation offered by the assessee regarding cash sales in SBNs was not acceptable. Consequently, the cash deposited in excess of cash balance as on 08.11.2016 should be treated as unexplained income u/s.69 of the Act. Finally, the Ld. DR submitted that, there is no infirmity in the order passed by the revenue authority and prayed before the bench to dismiss the contention of the assessee on this issue.
We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. In the present case before us, the assessee has made cash sales during the demonetization period in SBNs and deposited the same in its bank account. The Ld. AO has added the cash deposit of Rs.80,01,400/- u/s. 69 of the Act treating the cash deposit as unexplained on the ground that acceptance of SBNs post 08.11.2016 was prohibited by the government. We found that under similar circumstances, the co-ordinate bench of Tribunal in the case of ITO Vs. Surabii Gold (supra) at para no.11 of its order has held as under :
“ 11. Having said so, let us come back whether is there any prohibition in accepting demonetized currency notes of Rs. 500 and Rs. 1000 after 08.11.2016 and up to 31.12.2016. The Assessing Officer is mainly on the issue of notification issued by the RBI to deal with the specified bank notes and argued that the assessee is not one of the eligible person to accept or to deal with specified bank notes and thus, even if assessee furnish necessary evidence, the assessee cannot accept specified bank notes after demonetization and the explanation offered by the assessee cannot be accepted. No doubt specified bank notes of Rs. 500 & Rs. 1000 has been withdrawn from circulation from 09th November, 2016 onwards. The Government of India and RBI has issued various notifications and SOP to deal with specified bank notes. Further, the RBI allowed certain category of persons to accept and to deal with specified bank notes up to 31st December, 2016. Further, the specified bank notes (cessation of liability) Act, 2017, also stated that from the appointed date no person can receive or accept and transact specified bank notes, and appointed date has been stated as 31st December, 2016. Therefore, there is no clarity on how to deal with demonetized currency from the date of demonetization and up to 31st December, 2016. Therefore, under those circumstances, some persons continued to accept and transact the specified bank notes and deposited into bank accounts. Therefore, merely for the reason that there is a violation of certain notifications/GO issued by the Government in transacting with specified bank notes, the genuine explanation offered by the assessee towards source for cash deposit cannot be rejected, unless the Assessing Officer makes out a case that the assessee has deposited unaccounted cash into bank account in specified bank notes.” 15.1 On perusal of above, we found that the Tribunal has held that merely for the reason that there is a violation of certain notification/G.O. issued by the government in transacting with SBNs, the genuine explanation offered by the assessee towards source of cash deposit cannot be rejected, unless the Ld. AO made out the case that the assessee has deposited unaccounted cash into bank account in SBNs. We also found from the order of Ld. AO that, the source of deposit of cash has been explained by the assessee from cash sales and has been recorded in the books of account of the assessee. Neither the books of account has been rejected by the Ld. AO nor any deficiency in the books of account has been pointed out by the Ld. AO. Further, no deficiency with regard to sales invoices produced by the assessee in support of cash sales has been found by the Ld. AO. The Ld. AO also did not point out any abnormal variation in the turnover of the assessee and pattern of cash deposit by the assessee in its bank account during demonetization period as compared to other periods during the year as well as other years. There is no dispute about the facts that no discrepancy qua source of cash deposit except receipt of cash in SBNs has been pointed out before us. Therefore, relying on the decision of the co-ordinate bench of Tribunal in the case of ITO Vs. Surabii Gold (supra), we hold that, the mere fact that accepting SBNs post 08.11.2016 might have violated RBI guidelines, cannot ipso facto lead to addition u/s.69 of the Act. Therefore, under the present facts and circumstances of the case, we are of the opinion that there was no justification on the part of Ld. AO in denying the explanation given by the assessee and make addition u/s.69 of the Act. Accordingly, the addition of Rs.80,01,400/- made by the Ld. AO is hereby directed to be deleted.