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Income Tax Appellate Tribunal, LUCKNOW BENCH “B”, LUCKNOW
Before: SHRI KUL BHARAT & SHRI NIKHIL CHOUDHARY
PER KUL BHARAT, VICE PRESIDENT.:
This bunch of four appeals, by the assessee are directed against the different orders of the Learned Commissioner of Income-tax (Appeals), Lucknow-3 [hereinafter referred as to “Ld. CIT(A)”], pertaining to the assessment years 2002-03, to 2005-06 respectively. The assessee has raised similar grounds in all these four appeals. For the sake of brevity and convenience, all the appeals are being disposed of by way of common order. First, we take up the IT(SS)A. No. 90/LKW/2022, pertaining to the A.Y. 2002-03 is taken as a lead case. The assessee has raised following grounds of appeal: -
1. That the Learned CIT Appeal has erred in confirming the assessment order dated 13.01.2016 passed by ACIT Central Circle, Bareilly which was beyond the period of limitation with reference to the High Courts order dated 19.05.2014 and provisions of the Income Tax Act, 1961.
2. That the Learned CIT Appeal has erred in confirming passing of re- assessment order which had not abated on the date of search on 11.02.2005.
3. That the Learned CIT Appeal has erred in confirming the additions made on the assessee by the Assessing Officer despite the fact that no incriminating evidences were found during the search. to 93/LKW/2022 Page 2 of 18 4. That the Learned CIT Appeals has erred in confirming the following additions on account of under mentioned disallowances which are illegal and liable to be deleted. (i) Rs.35,00,000 on account of disallowance of Commission expenses. (ii) Rs.9,60,000 on account of disallowance of Advertisement expenses. (iii) Part allowance on disallowance of Depreciation on addition to fixed assets during the year.
The assessee reserves the right to add/amend one or more ground of appeal
during course of hearing.”
2. The assessee has also raised the following additional grounds of appeal: - “1. Because the approval given by the JCIT u/s 153D of the Act, 1961 to the order passed, u/s 153A is without application of mind, purely in a mechanical manner, without appreciating the facts and not following the provisions/mandate of the section, which makes the order passed u/s 153A nonest, void ab-initio bad in law, the same be quashed.”
3. The facts giving rise to the present appeal are that the case of the assessee was centralized vide order u/s 127 of the Act. The assessee is engaged in the business of raw material to make ‘Panjiri’ to supply to Government of Uttar Pradesh. The assessee had filed a return of income declaring total income of Rs.85,88,523/- on 29.10.2002. In this case, a search & seizure action was carried out u/s 132 of the Income Tax Act, 1961 (“Act”, for short) at the premises of the assessee on 11.02.2005. Thereafter, a notice u/s 153A of the Act was issued and served upon the assessee, calling upon the assessee to file its return of income. In response thereto, the assessee filed letter dated 28.09.2006 stating that the original return as filed for the A.Y. 1999-2000 to 2004-05 may be taken to have filed u/s 153A(a) of the Act. During the course of assessment proceedings, it was noted by the Assessing Officer that the assessee had booked bogus expenses related to Commission and Advertising amounting to Rs.35,00,000/- and Rs.9,60,000/- respectively. The Assessing Officer, further noted that the assessee ought to have deducted tax @ 10% u/s 194H of the Act. Thus, the Assessing Officer made an addition of Rs.44,60,000/- in this to 93/LKW/2022 Page 3 of 18 regard and further the Assessing officer disallowed depreciation of Rs.10,67,898/-. Thus, he made an addition of Rs.55,27,898/- and assessed income u/s 153A of the Act at Rs.1,41,16,421/- against the returned income of Rs.85,88,523/-. Aggrieved by this, the assessee preferred an appeal before the Ld. CITA) who partly allowed the appeal of the assessee whereby he granted part relief in respect of the depreciation on the basis that during the appellate proceedings Bills & Vouchers pertaining to fixed assets amounting to Rs.18,23,310/- were produced for verification. Aggrieved by this, the assessee is in appeal before this Tribunal.
Apropos to the Ground Nos. 2, 3 and 4 of the Ld. Counsel for the assessee contended that the no addition was made on the basis of any incriminating material/evidence found during the course of search. Therefore, the additions made and sustained by the lower authorities deserves to be deleted, in the light of the judgment of the Hon’ble Apex Court rendered in the case of PCIT Vs. Abhisar Buildwell (P.) Ltd (2023) 149 taxmann.com 399 (SC)/(2023) 293 Taxman 141 (SC)/(2023) 454 ITR 212 (SC). He took us through the assessment order and drew our attention to the paper book to buttress the contention that all details were disclosed in the return of income and the disallowance is made on the basis of the original return, more particularly, commission expenses and other expenses debited in Profit & Loss account. He contended that there is not even a single addition based on the incriminating evidence recovered from the premises of the assessee during the course of search action. Therefore, he prayed that the impugned additions may be directed to be deleted.
5. On the other hand, the Ld. Departmental Representative for Revenue opposed the submissions and supported the orders of the lower authorities. The Ld. CIT-DR contended that this case has a ill-famed history at the time of search, the assessee and his to 93/LKW/2022 Page 4 of 18 musclemen prevented the search team from collecting the incriminating documents. However, the Assessing Officer has given clear finding that the assessee had claimed bogus expenses. Therefore, he prayed that the impugned additions may be sustained. However, he could not rebut the contention of the Ld. Counsel for the assessee that the impugned additions are not based upon any incriminating documents gathered during the course of search.
We have heard the rival contention and perused the materials available on record. The issue whether additions can be made even if no incriminating material is found during the search action is no more res integra. The Hon’ble Apex Court in the case of PCIT vs Abhisar Buildwell (P.) Ltd (supra) has now settled the controversy. The relevant contents of the judgment of the Hon’ble Supreme Court are reproduced as under: -
"14. In view of the above and for the reasons stated above, it is concluded as under: (i) that in case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A; (ii) all pending assessments/reassessments shall stand abated; (iii) in case any incriminating material is found/unearthed, even, in case of unabated/completed assessments, the AO would assume the jurisdiction to assess or reassess the 'total income' taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under sections 147/148 of the Act, subject to fulfillment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved. The question involved in the present set of appeals and review petition is answered accordingly in terms of the above and the appeals and review petition preferred by the Revenue are hereby dismissed. No costs.” to 93/LKW/2022 Page 5 of 18 7. Admittedly, there is no addition based upon any evidences or incriminating documents/material collected during the course of search. To our query, the Ld. CIT-DR could not point out any incriminating materials which was recovered during the course of search and was the foundation of such additions.
8. Thus, in view of the judgment of the Hon’ble Supreme Court in the case of CIT vs Abhisar Buildwell (P.) Ltd (supra), the impugned additions cannot be sustained under the facts and circumstances of the present case. We, therefore, direct the Assessing Authority to delete the additions. Ground Nos. 2, 3 and 4 of the assessee’s appeal are allowed, accordingly.
9. By way of ground no. 1, the assessee has challenged the assessment order on the ground of the limitation. It is submitted on behalf of the assessee that the date of search in this case was 11.02.2005. The limitation available in the normal course was 21 months from the end of relevant financial year i.e. the assessment ought to have been completed on 31.12.2006. It is stated that a writ petition was filed before the Hon’ble Jurisdictional High Court on (around) 15.11.2006 and the Hon’ble Court was pleased to grant stay on 23.11.2006. Thereafter, on 19.05.2014, the stay was vacated and the Hon’ble High Court granted time to AO to conclude the assessment within the three months. As per the assessee, the certified copy of the order was received on 11.06.2014 by the office of the Ld. PCIT and the assessment was completed on 13.01.2016. He contended that the assessment is hopelessly barred by the time and as such deserves to be quashed.
On the other hand, the Ld. CIT-DR opposed the submissions and submitted that from a bare reading of the Judgment of the Hon’ble High Court in Writ Petition No. 1709 of 2006, it is evident that the Assessing Authority was directed to to 93/LKW/2022 Page 6 of 18 complete the assessment within the period of three months, after receiving the certified copy of the order. The contention of the CIT(DR) is that the direction of Hon’ble High Court is clear and it speaks about receipt of the order by the Assessing Officer. The evidences furnished by the assessee is regarding the receipt of certified copy of the order by the office of the Ld. PCIT. No evidence has been furnished by the assessee suggesting receipt of certified copy of the order prior to the date which is mentioned by the Assessing Officer in his report. As per the Assessing Officer, he received certified copy of the order on 30.11.2015 and the Assessment order was passed on 13.01.2016. Under these facts, we are of the view that it cannot be conclusively construed that the assessment order is barred by time, we hold accordingly.
The ground no.1 of assessee’s appeal is dismissed.
Apropos to the additional ground raised by the assessee in this appeal. It is contended by the Ld. Counsel for the assessee that the approval has been granted by the concerned authority mechanically without applying its mind. He contended that in view of the binding precedent on this issue, the assessment order may be quashed.
On the other hand, the Ld. Departmental Representative for the Revenue opposed the submissions and submitted that such additional ground cannot be raised at such a belated stage. Further, the contention of the assessee that the approval has been granted without application of mind is completely incorrect. It was contended that the process of granting approval is not merely a formality but the concerned authority remains in connect with the Assessing Officer at every stage of proceedings and after applying its mind, it grants approval. to 93/LKW/2022 Page 7 of 18 13. We have given our thoughtful consideration to the submissions made by the Ld. Representatives of the parties. Before us, the assessee has not brought any material suggesting that the approval was granted without verifying/examining the records. In the absence of specific materials corroborating the facts that the approving authority had no knowledge about the facts of the case such inference that there was no application of mind cannot be drawn. Therefore, this additional ground of the assessee is rejected.
In the result, the appeal of the assessee is partly allowed, in the terms indicated hereinbefore.
Now coming to the appeals of the assessee in IT(SS)A. Nos. 91 & 92/LKW/2022 for the A.Y. 2003-04 & 2004-05 respectively. The assessee has raised the following grounds of appeal: - IT(SS)A No. 91/LKW/2022 for the A.Y. 2003-04
1. That the Learned CIT Appeal has erred in confirming the assessment order dated 13.01.2016 passed by ACIT Central Circle, Bareilly which was beyond the period of limitation with reference to the High Courts order dated 19.05.2014 and provisions of the Income Tax Act, 1961.
2. That the Learned CIT Appeal has erred in confirming passing of re- assessment order which had not abated on the date of search on 11.02.2005.
3. That the Learned CIT Appeal has erred in confirming the additions made on the assessee by the Assessing Officer despite the fact that no incriminating evidences were found during the search.
4. That the Learned CIT Appeals has erred in confirming the following additions on account of under mentioned disallowances which are illegal and liable to be deleted. (i) Rs.22629880 on account of disallowance of Commission expenses. (ii) Rs.1500000 on account of disallowance of Advertisement expenses. (iii) Part allowance on disallowance of Depreciation on addition to fixed assets during the year.
5. That the Learned CIT Appeal has erred in confirming the disallowance of rebate u/s 80G of Rs.375000 without assigning any reasonable ground in the assessment order which is to be allowed.
6. That the Learned CIT Appeal has erred in confirming the interest u/s 234B which was wrongly levied in regard to the disputed income.
7. The assessee reserves the right to add/amend one or more ground of appeal
during course of hearing.” to 93/LKW/2022 Page 8 of 18 IT(SS)A No. 92/LKW/2022 for the A.Y. 2004-05
1. That the Learned CIT Appeal has erred in confirming the assessment order dated 13.01.2016 passed by ACIT Central Circle, Bareilly which was beyond the period of limitation with reference to the High Courts order dated 19.05.2014 and provisions of the Income Tax Act, 1961.
2. That the Learned CIT Appeal has erred in confirming passing of re- assessment order which had not abated on the date of search on 11.02.2005.
3. That the Learned CIT Appeal has erred in confirming the additions made on the assessee by the Assessing Officer despite the fact that no incriminating evidences were found during the search.
4. That the Learned CIT Appeals has erred in confirming the following additions on account of under mentioned disallowances which are illegal and liable to be deleted. (i) Rs.11368146 on account of disallowance of Commission expenses. (ii) Rs.254600 on account of disallowance of Commission expenses. (iii) Rs.79375 on account of Advertisement expenses (iv) Part allowance on disallowance of Depreciation on addition to fixed assets during the year.
5. That the Learned CIT Appeal has erred in confirming the interest u/s 234B which was wrongly levied in regard to the disputed income.
6. The assessee reserves the right to add/amend one or more ground of appeal
during course of hearing.”
15. The assessee has also raised the additional grounds of appeal are as under: - IT(SS)A NO. 91/LKW/2022 for A.Y. 2003-04
1. Because the approval given by the JCIT u/s 153D of the Act, 1961 to the order passed, u/s 153A is without application of mind, purely in a mechanical manner, without appreciating the facts and not following the provisions/mandate of the section, which makes the order passed u/s 153A nonest, void ab-initio bad in law, the same be quashed.” IT(SS)A NO. 92/LKW/2022 for A.Y. 2004-05
1. Because the approval given by the JCIT u/s 153D of the Act, 1961 to the order passed, u/s 153A is without application of mind, purely in a mechanical manner, without appreciating the facts and not following the provisions/mandate of the section, which makes the order passed u/s 153A nonest, void ab-initio bad in law, the same be quashed.”
The Ld. Representatives of the parties agreed that the identical grounds have been raised in these appeals as were in IT(SS)A. No. 90/LKW/2022 for the A.Y. 2002-03. Ld. Counsels for the assessee and Ld. DR have adopted the same arguments. We have decided the identical grounds in IT(SS)A. No. 90/LKW/2022, by observing as under: - to 93/LKW/2022 Page 9 of 18 “6. We have heard the rival contention and perused the materials available on record. The issue whether additions can be made even if no incriminating material is found during the search action is no more res integra. The Hon’ble Apex Court in the case of PCIT vs Abhisar Buildwell (P.) Ltd (supra) has now settled the controversy. The relevant contents of the judgment of the Hon’ble Supreme Court are reproduced as under: - "14. In view of the above and for the reasons stated above, it is concluded as under: (i) that in case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A; (ii) all pending assessments/reassessments shall stand abated; (iii) in case any incriminating material is found/unearthed, even, in case of unabated/completed assessments, the AO would assume the jurisdiction to assess or reassess the 'total income' taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under sections 147/148 of the Act, subject to fulfillment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved. The question involved in the present set of appeals and review petition is answered accordingly in terms of the above and the appeals and review petition preferred by the Revenue are hereby dismissed. No costs.”
Admittedly, there is no addition based upon any evidences or incriminating documents/material collected during the course of search. To our query, the Ld. CIT-DR could not point out any incriminating materials which was recovered during the course of search and was the foundation of such additions.
Thus, in view of the judgment of the Hon’ble Supreme Court in the case of CIT vs Abhisar Buildwell (P.) Ltd (supra), the impugned additions cannot be sustained under the facts and circumstances of the present case. We, therefore, direct the Assessing Authority to delete the additions. Ground Nos. 2, 3 and 4 of the assessee’s appeal is allowed, accordingly. 9……. 10….. 11…. 12….
We have given our thoughtful consideration to the submissions made by the Ld. Representatives of the parties. Before us, the assessee has not brought any material suggesting that the approval was granted without verifying/examining the records. In the absence of specific materials corroborating the facts that the approving authority had no knowledge about the facts of the case such inference that there was no application of mind cannot be drawn. Therefore, this additional ground of the assessee is rejected.” to 93/LKW/2022 Page 10 of 18 17. We, therefore, adopting the same reasoning as in IT(SS)A. No.90/LKW/2022 for A.Y. 2002-03 and apply mutatis mutandis to IT(SS)A. Nos. 91 & 92/LKW/2022 for A.Ys. 2003-04 & 2004- 05 hereby allow ground nos. 2, 3 and 4 whereas Ground No. 1 and additional ground are dismissed. The other grounds raised i.e. ground no. 5 & 6 in IT(SS)A. No.91/LKW/2022 are also allowed since the levy of interest u/s 234B of the Act is consequential and disallowance u/s 80G of the Act of Rs.3,75,000/- is not based on any incriminating evidence. Rest of the grounds are general in nature. Needs no separate adjudication. Appeal of the assessee is partly allowed.
Now coming to the appeal of the assessee is related to IT(SS)A. No. 93/LKW/2022 for the A.Y. 2005-06. The assessee has raised the following grounds of appeal: - IT(SS)A No. 93/LKW/2022 for the A.Y. 2005-06
1. That the Learned CIT Appeal has erred in confirming the order passed by the Learned Assessing Officer even though the order passes beyond the period of limitation as provided u/s 153(b) 2nd Proviso (i).
2. That the Learned CIT Appeal has erred in confirming addition of Rs.15,86,269/- on account of disallowance of depreciation expenses which is illegal and liable to be deleted.
The assessee reserves the right to add/amend one or more ground of appeal
during the course of hearing.”
19. The assessee has raised the additional grounds of appeal are as under: -
IT(SS)A NO. 93/LKW/2022 for A.Y. 2005-06 “1. Because the approval given by the JCIT u/s 153D of the Act, 1961 to the order passed, u/s 153A is without application of mind, purely in a mechanical manner, without appreciating the facts and not following the provisions/mandate of the section, which makes the order passed u/s 153A nonest, void ab-initio bad in law, the same be quashed.” 20. Ground no. 1 of the assessee’s appeal is against the assessment order passed is barred by time.
It is stated by the Ld. Counsel for the assessee that the A.Y. 2005-06 was not included in the judgment of the Hon’ble to 93/LKW/2022 Page 11 of 18 High Court of Allahabad in Writ Petition CMWP No.1709 of 2006 as no petition was preferred against the decision pertaining to the A.Y. 2005-06. He submitted that by way of the aforesaid petition, the assessee had challenged the search action conducted by the Revenue. Under these facts, receipt of the copy of the judgement of Hon’ble High Court by the assessee has no relevance. He, therefore, submitted that the impugned assessment order deserves to be quashed on the sole ground of limitation. Further, he contended that in this case search action was carried out on 11.02.2005 and time to frame assessment expired on 31.12.2006, hence the assessment is clearly barred by time.
On the other hand, the Ld. Departmental Representative opposed the submissions and supported the orders of the lower authorities.
We have heard the Ld. Representatives of the parties and perused the materials on record. It is transpired from the records that the assessee has taken a specific ground before the Ld. CIT(A) regarding assessment order being barred by time. It was categorically stated that no petition was filed before Hon’ble Jurisdictional High Court with regard to the A.Y. 2005-06 and also stated that the prayer in the petition was made for the A.Y. 2002-03 to A.Y. 2004-05 but there was no prayer or petition related to the A.Y. 2005-06. We find that the Hon’ble High Court has recorded in its judgment about the prayer made by the assessee. For the sake of clarity, the prayer so made is reproduced as under: -
“a. Issue a suitable writ order or direction declaring the alleged search as well as all subsequent proceedings thereto, as illegal, null and void and b. Issue a suitable writ order or direction in the nature of prohibition, restraining or prohibiting the respondents their officers, servants and agents in proceeding in any manner whatsoever pursuant to the alleged search and to 93/LKW/2022 Page 12 of 18 c. Issue a writ of certiorari or any other appropriate writ or order quashing the proceedings under section 133A of the Act pending before the respondent No.2 for the assessment years 1999-2000 to 2004-05; d. Issue writ of certiorari or any other appropriate writ or order quashing the order dated 11.10.2006 passed by the respondent No.2; and e. Issue a writ of certiorari or any appropriate writ or order quashing the orders dated 27.10.2006 passed by the respondent No.2 in purported exercise of the powers under section 271(1)9b) of the Act for the assessment year 2000-01 (AnnexureP/12) and assessment year 2001-02 (Annexure P/16) f. Issue a writ of certiorari or any other appropriate writ, order or direction prohibiting the respondents, their officers, servants and agents from proceeding in any manner whatsoever under section 153A of the Act or pursuant to the orders dated quashing the orders dated 27.10.2006 passed by the respondent No.2.”
We find force into the contention of the Ld. Counsel for the assessee that if there is no stay operating against continuation of assessment proceedings pertaining to the assessment year 2005- 06 in such event the AO ought to have passed assessment order within the time line prescribed under the Act. It is also pertinent to mention here that in the remand report before the Ld.CIT(A), the AO has stated that though the case for A.Y. 2005-06 was not subject matter of the writ petition filed by the assessee but there are special provisions u/s 153B(1) of the Act which mentioned that the assessment or re-assessment for the assessment year related to the previous year in which the search action had taken place was to be completed with the assessments of other six preceding years, prior to the year in which search was conducted and covered by search. Hence, the assessment could have been completed along within the time allowed in the normal provisions of the Act. This reasoning of the Assessing Authority is fallacious; as no such provision is brought to our notice mandating the AO to pass assessment order along with other assessment years. Hence, there was no statutory embargo in the present case. We hold, accordingly.
Now coming to the ground no. 2 of the assessee’s appeal, the assessee has challenged the confirmation of the addition of to 93/LKW/2022 Page 13 of 18 Rs.15,86,269/- made on account of disallowance of depreciation. Ld. Counsel for the assessee reiterated the submissions as made before the Ld. CIT(A). He contended that the Assessing Officer was not justified in making the disallowance on the ground that the assessee had not carried out any business activities. Ld. Counsel for the assessee drew our attention to the relevant contents of the assessment order which is reproduced as under: - “During the year under consideration, it is seen that the assessee has not performed any business activities. The only activity is sale of some of the packing & other material left over from the previous year. There are no purchases and no expenses under the heads Freight, Power & Fuel, Wages etc. have been booked. Meaning thereby that no manufacturing activities have taken place during the year. There is no manufacturing activities during the year despite that the assessee has claim depreciation of Rs.2287815/-, out of which the depreciation on plant and machiney is at Rs.1586269/-. As is evident from the foregoing no manufacturing activity has been done by the assessee during the year under consideration, therefore, the claim of depreciation on plant and machinery is not justify. Further, a operations in the assessee company have been closed down Since year under consideration and no resumption of activity has taken place since then. Therefore, the closure of the manufacturing activity was not temporary affair. Also the assessee has not under taken any preventive maintenance of plant and machinery. The provisions of section 32(1) of the I.T. Act say that the assets must be used for the purpose of the business or profession for claiming deduction of depreciation. In view of these facts the claim of depreciation on plant and machinery is not justified. The same, amounting to Rs.15,86,269/-, is disallowed and the income is enhanced by the same amount.”
Ld. Counsel for the assessee reiterated the submissions as made before the Ld. CIT(A) and relied upon the judicial pronouncement to buttress the contention that the depreciation is allowable even on the passively use of plant and machinery.
On the other hand, the Ld. Departmental Representative supported the orders of the authorities below and contended that the authorities were justified in disallowing the claim as there was no business activities carried out by the assessee which in fact has been admitted by the assessee itself.
We have heard the Ld. Representatives of the parties. Issue of disallowance of depreciation and perused the materials on record. The Ld. CIT(A) has disallowed the depreciation by observing as under: - to 93/LKW/2022 Page 14 of 18 “8.2 During the appellate proceedings it has been submitted that the depreciation of Rs. 15,86,269/- on plant & machinery was disallowed since plant was not in operation it is established law that unless business is closed forever, depreciation will be allowed since it has its passive use. This business, was totally dependent on orders and in AY. 2005-06, we were hopeful to get the orders. So all activities were maintained as, of going concern. The word used for the purposes of business is in wider sense, it will also include the circumstances that machinery was put to use. Refer to Niranjan Lal Ram Chandra v. CIT 49 ITR 177 (All) and integrated Technologies Ltd. v/s Commissioner of Income Tax 2011. Thus, assessee was entitled to depreciation and it should have been allowed.” 8.3 It is admitted fact that the appellant has closed down the business activities in the year under consideration. There were no purchases, no Sales and no expenditure related with manufacturing expenses has been Claimed in the Profit & Loss Account. It has been observed that in the year under consideration business activity had been closed down by the appellant; therefore, I am of the considered view that depreciation on Plant & Machinery is not allowable. Therefore, there was no interference required in the decision of the Assessing Officer. Therefore, this ground of appeal is dismissed.”
29. The claim of the assessee was declined purely on the ground that no business activity was carried out during the year, however, the contention of the assessee is that the depreciation cannot be disallowed since the business was not closed forever. In support of this contention, Ld. Counsel for the assessee has relied upon the decision of the Hon’ble High Court of Allahabad rendered in the case of Niranjan Lal Ram Chandra vs CIT [49 ITR 177 (All)] and the judgment of the Hon’ble Delhi High Court in the case of Integrated Technologies Ltd vs CIT in ITA. No.530/2011. We find that the Ld. CIT(A) has not considered the judicial pronouncement and did not give any finding on the applicability on the facts of the present case. Ld. Counsel has relied on the judgment of the Hon’ble Delhi High Court rendered in the case of CIT vs. Integrated Technologies Ltd wherein the Hon’ble Delhi High Court has affirmed the view of the Tribunal that the depreciation would be allowable if the plant and machinery is used passively for business purpose. The Hon’ble Delhi High Court has held as under: -
“8. In the aforesaid view of the matter, the Tribunal held that the plant and machinery and other assets on which depreciation was claimed was kept ready for use and accordingly the depreciation was allowable to 93/LKW/2022 Page 15 of 18 under Section 32. The revenue challenges the order of the Tribunal and seeks to raise the following questions as substantial questions of law : A) Whether the Income Tax Appellate Tribunal was correct in holding that the assessee could get benefit of depreciation under Section 32 of the Act on the basis of "passive use" of the assets? B) Whether the Income Tax Appellate Tribunal ought to have appreciated that in the facts and circumstances of the present case there was no question of "passive use" of the assets? C) Whether the Income Tax Appellate Tribunal erred in ignoring the clear language of Section 32? In our opinion, no substantial question of law arises from the decision of the Tribunal. It has been found as a fact by the Tribunal that the assessee had not closed its business and had every intention to revive the same. The basis for this finding is the fact that the assessee had kept its establishment alive by paying salary and other allowances to the staff and had also acquired plant and machinery in the relevant previous year and had further incurred repair expenditure on its existing plant and machinery. These findings have not been challenged by the revenue as perverse. In fact, the allowance of the salary payments, staff welfare and repairs and maintenance expenditure by the CIT (Appeals) was not challenged by the revenue by filing any appeal on those points before the Tribunal and this aspect has been referred to by the Tribunal in para 9 of its order. Thus, the revenue had impliedly accepted the fact that the business was kept alive in the hope of revival and there was only a temporary lull in the business activities. If the assessee had purchased new plant and machinery and had also incurred repair expenditure of Rs.1.23 lakhs in respect of the existing machinery, it is a fair and reasonable inference to draw that the assessee wants to keep the business alive and revive the same at the earliest opportunity. The assessee has also stated before the BIFR that after the change in the business scenario globally, the company is expecting to receive substantial orders for its products. Thus, the finding of the Tribunal that the business of the assessee was not closed is fully supported by facts on record which have not been challenged by the revenue. The other question as to whether the plant and machinery should have been actually put to use in order to be entitled to depreciation under Section 32 and that mere passive use, in the sense that they were kept ready for use as and when the business was revived, would be sufficient compliance with Section 32 should not detain us since it has already been decided in the affirmative by at least three judgments of this Court.
The Tribunal has referred to the judgments in Capital Bus Service (supra), CIT Vs. Refrigeration and Allied Industries Ltd. (supra) & CIT Vs. Panacea Biotech Ltd. (supra) and has applied the ratio laid down therein to the facts of the present case. The ratio in brief is that it is not necessary that the plant and machinery owned by the assessee should be actually put to use in the relevant accounting year to justify the claim of depreciation and that even if the plant and machinery or other asset is kept ready for use in the assessee's business, the assessee would be entitled to depreciation. The only condition is that the business should not have been closed down once for all and that the assessee should demonstrate that the hopes of the business being revived are alive and real. It is however not a matter that can turn entirely on the assessee's hopes alone. There should be evidence or material to show that the assessee took efforts to keep the business alive in the hope of reviving the same. Maintaining the office and establishment, complying with the statutory formalities, not disposing of the plant and machinery, incurring expenses on the repair of plant and machinery etc., are some of the indications of nurturing the hopes of reviving the business. The above are only illustrative instances and are by no means exhaustive and the to 93/LKW/2022 Page 16 of 18 question as to whether the assets were kept ready for use in the business is largely to be decided on the facts and circumstances of each case. In our opinion, the Tribunal has not committed any error in applying the ratio laid down in the judgments of this Court to the facts of the present case in order to uphold the assessee's claim for depreciation.
10. In the light of the foregoing discussion we are of the view that no substantial question of law arises from the order of the Tribunal for decision. Accordingly, the appeal filed by the Revenue is dismissed with no order as to costs.”
Further, reliance is placed on the judgment of the Hon’ble High Court of Allahabad, although was rendered under the Income Tax Act, 1922. The relevant contents of the Hon’ble High Court of Allahabad in the case of Niranjan Lal Ram Chandra vs CIT has held as under: -
“Central Provinces Manganese Ore Co. v. Commissioner of Income-tax, is not very helpful in the instant case. What was decided in Nathmal Sriniwas v. Commissioner of Income-tax, is that in order to attract the application of section 10(2)(vii) the machinery or plant must be such as was used for the purposes of the business for at least a part of the accounting year and that if it was not used at any time during the accounting year, no allowance can be claimed. Ramasawami and Ahmad JJ. held that the machinery was not used at any time during the accounting year. When the business itself was not carried on there was no question of the machinery being used for the purposes of the business. It was nor used, not only actively but also passively. In the present case the assessee did not discontinue its business before the sale of the trucks. Capoor and Grover JJ. laid down in Rohtak and Hissar Districts Electricity Supply Co. Ltd. v. Commissioner of Income-tax : "In order to attract the operation of clauses (v), (vi) and (vii) of section 10(2) the machinery and plant must be such as were used in whatever sense that word is taken, at least for a part of the accounting year", relying on the case of Liquidators of Pursa Ltd. v. Commissioner of Income-tax. The facts of the case are distinguishable from those of the instant case, there the business was closed down on December 31, 1954, and the machinery was sold; the sale could not have been the sale the machinery used for the purposes of the business in the accounting year commencing on January 1, 1955. When the business itself did not exist in the accounting year how could the plant be said to have been used for the purpose of the business? According to Fazl Ali C.J. and Manohar Lall J. in Commissioner of Income- tax v. Dalmia Cement Ltd., the word "used" is to be understood in a wide sense so as the embrace passive as well as active user. The learned Chief Justice, speaking for the court, followed the case of Viswanath Bhaskar Sathe and said that depreciation may be allowed even though the machinery was not in active use and was kept idle. This case, however, is not of any great help because the machinery there was undoubtedly actively used for some time during the accounting year and, therefore, it was machinery used for the purposes of the business even though in a later part of the accounting year it was not in active use. I, therefore, decide that section 10(2)(vii) together with the second proviso is applicable in the instant case and the question must be answered in the affirmative. to 93/LKW/2022 Page 17 of 18 BRIJLAL GUPTA J. - I agree. BY THE COURT. - We answer the question in the affirmative and direct that a copy of this judgment be sent to the Income-tax Appellate Tribunal under the seal of the court and the signature of the Registrar as required by section 66(5) of the Income-tax Act. We further direct that the assessee shall pay to the Commissioner of Income-tax his costs of the reference, which we assess at Rs.
Question answered in the affirmative.”
In the light of the above binding precedents, we are of the view that the Ld. CIT(A) ought to have considered the facts and ratio of the aforesaid case laws and applied on the facts of the present case. Therefore, the order passed by the Ld. CIT(A) is erroneous cannot be sustained in the facts and circumstances of the present case. The ground raised in this appeal is allowed.
The additional ground raised by the assessee in this appeal are identical grounds as were in IT(SS)A. No. 90/LKW/2022 for the A.Y. 2002-03. Ld. Counsel for the assessee and Ld. DR have adopted the same arguments. We have decided the similar ground in IT(SS)A. No.90/LKW/2022 for A.Y. 2002-03 and our finding on this issue shall apply mutatis mutandis to IT(SS)A. No. 93/LKW/2022 as contained in para no. 13 of this order. Therefore, additional ground is dismissed.
In the result, appeal of the assessee is partly allowed in the terms indicated hereinbefore.
And in the combined result, all the four appeals of the assessee in IT(SS)A. No. 90/LKW/2022 to IT(SS)A. No. 93/LKW/2022 are partly allowed. Parties to bear their own cost.
Order pronounced in the open Court on 29/08/2025.